Report sinks mortgage giants’ shares
Posted on Tuesday, August 19, 2008
Fannie Mae and Freddie Mac tumbled to about 18-year lows in New York trading Monday on concern the government will be forced to bail out the mortgagefinance companies, wiping out common stockholders.
Fannie Mae and Freddie Mac each fell as much as 22 percent after Barron’s reported that the Bush administration expects that the government-chartered companies will fail to raise the equity capital they need, prompting the U. S. Treasury to step in. Fannie Mae is down 84 percent this year. Freddie Mac has fallen 86 percent.
“It is very, very likely to happen before the end of the third quarter,” Ajay Rajadhyaksha, the head of fixed-income strategy for Barclays Capital Inc., said in an interview. “Without government help, we think there is very little chance of Freddie completing a significant capital raising.” The government plans to recapitalize Fannie Mae and Freddie Mac with taxpayer money should their capital raising fail, Barron’s reported, citing a person in the Bush administration it didn’t identify. A rescue of the companies would include preferred stock with a seniority, dividend preference and convertibility that would wipe out common stockholders, Barron’s reported.
Treasury Secretary Henry Paulson, who on July 31 received the unprecedented authority he requested from Congress to help the companies if needed, has said a bailout won’t be necessary.
“We aren’t going to comment on speculation,” Treasury Department spokesman Jennifer Zuccarelli said. “As the secretary has said, we have no plans to use these authorities.” Fannie Mae fell $ 1. 76, or 22. 25 percent, to close at $ 6. 15 in New York Stock Exchange composite trading. Freddie Mac fell $ 1. 46, or 25 percent, to close at $ 4. 39.
Fannie Mae, the nickname for the Federal National Mortgage Association, is the governmentformed corporation established in 1938 to purchase both government-backed and conventional mortgages from lenders and securitize them.
Freddie Mac is the nickname for the Federal Home Loan Mortgage Corporation, created by Congress in 1970. Like Fannie Mae, it also purchases mortgages, pools them and sells them as securities to investors. Both are government-sponsored enterprises and are stockholderowned companies.
The two companies hold or guarantee more than $ 5 trillion in mortgages — almost half of the nation’s total.
The article in Barron’s business weekly “significantly overstates our financial situation,” said Sharon McHale, a spokesman for McLean, Va.-based Freddie Mac. She said the company is “adequately capitalized” and believes “we will get through the current housing market crisis.” Brian Faith, a spokesman for Washington-based Fannie Mae, wouldn’t comment immediately.
The companies have been battered by record delinquencies and rising losses amid the worst housing slump since the Great Depression, posting four straight losses totaling $ 14. 9 billion. Both cut their dividends this month and announced plans to slow growth after bigger-than-expected losses for the second quarter.
Freddie Mac’s Chief Executive Officer Richard Syron said Aug. 6 that the U. S. housing market is still “searching for a bottom” and that most of the company’s expected losses have yet to be realized. The U. S. mortgage delinquency rate has set a record every quarter since March 2007, and the rate of late payers going into foreclosure is also at an all-time high, Freddie Mac reported.
Fannie Mae has raised $ 14. 4 billion in new capital since last December to offset credit losses. Freddie Mac, which sold $ 6 billion in preferred stock in November, is struggling to raise $ 5. 5 billion more that that company said in May that it planned to sell.
Syron said Aug. 6 that Freddie Mac would have to pay “double-digit” rates to issue preferred stock, compared with the 8. 75 percent Fannie Mae paid for its preferred stock issue in May. The task is made even more difficult now that Freddie Mac’s market value has dropped to about $ 3 billion from $ 42 billion a year ago.
“If they’re unable to tap the markets to raise capital, I think we’re talking a matter of quarters before the government has to step in,” Joshua Rosner, an analyst with independent research firm Graham Fisher & Co. in New York, said in an interview this month.
Both companies will need to raise as much as $ 15 billion, Paul Miller, an analyst at Friedman, Billings, Ramsey & Co. in Arlington, Va., said earlier this month.
Fannie Mae paid a record high yield in a $ 3. 5 billion sale of three-year benchmark notes last week that drew less demand from Asia, the second-biggest buyer of Fannie Mae’s debt and mortgage-backed securities. Asian investors bought 22 percent of the issue, almost half the demand of three months ago and about two-thirds of Asia’s usual buying. Information in this article was contributed by John Brinsley and Shannon D. Harrington of Bloomberg News.
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