Bailout worries extend mortgage giants’ drop
Posted on Wednesday, August 20, 2008
URL: http://www.nwanews.com/adg/Business/234836/
WASHINGTON — Whether or not the government is actually on the verge of taking over mortgage finance companies Fannie Mae and Freddie Mac, investor fears that a bailout is imminent could turn such a worst-case scenario into reality.
“Some of these things become self-fulfilling prophecies because market confidence is so fragile,” said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics in Washington.
The two lenders fell a second day after a Barron’s article saying a takeover by federal authorities could wipe out stockholder equity.
Fannie Mae fell 14 cents, or 2. 3 percent, to close at $ 6. 01 in New York Stock Exchange trading. Freddie Mac fell 22 cents, or 5 percent, to close at $ 4. 17.
Fannie Mae, the nickname for the Federal National Mortgage Association, is the gov- ernment-formed 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.
They lost a combined $ 3. 1 billion between April and June. Half of their credit losses came from so-called Alt-A loans, which were made to borrowers with solid credit but little proof of their incomes, or small or no down payments.
A more likely scenario, analysts say, would stop short of nationalizing the two companies and would take the form of emergency loans to Fannie Mae and Freddie Mac from the Federal Reserve or Treasury Department.
The Treasury Department late last month gained the authority to boost Fannie Mae and Freddie Mac through an investment or a loan should the companies need their finances propped up because of soaring losses from bad mortgages.
The new government power, enacted by Congress after the companies’ shares plunged to levels not seen since the early 1990 s, for several weeks quieted worries that the companies could collapse.
But investors were spooked once again after a Barron’s magazine article over the weekend, citing an anonymous Bush administration source, reported that the government is pressing the companies to raise more money to guard against losses but doesn’t expect them to succeed.
The Barron’s report said the government is likely to buy preferred stock in the companies, wiping out common shareholders.
Treasury Secretary Henry Paulson, who had spent the last week in Beijing attending the Olympics with his family, was back at work on Monday, and aides said he was monitoring financial market developments as he always does.
Jennifer Zuccarelli, a Treasury spokesman, said the government has “no intention” of using its authority to invest in Fannie Mae and Freddie Mac and declined further comment.
Denials from government officials have not been soothing investors lately. “You don’t pass that sort of legislation unless there’s some sort of intent to use it,” said Barry Ritholtz, chief executive of FusionIQ, an asset management and research firm in New York.
The housing slump and continuing distress in the mortgage markets have withered the profit margins of Fannie Mae and Freddie Mac.
In response to last month’s steep slide in the companies ’ stock, the Securities and Exchange Commission banned some forms of trading that enable investors to bet that a stock’s price will fall. That order, intended to prevent stock manipulation, expired early last week.
Freddie Mac, in particular, has investors and analysts fearful.
The McLean-Va.-based company earlier this year promised to raise $ 5. 5 billion to shore up its finances but has so far not done so.
The company’s sinking share price makes doing so less attractive because the value of existing shareholders’ stake would be diluted.
“We’re certainly poised and ready when market conditions are appropriate,” Chief Financial Officer Buddy Piszel said in a recent conference call. “But there is no need for us to rush.”
Government officials are likely seeking to avoid a fullfledged takeover of the companies, said Bert Ely, an Alexandria, Va., banking industry consultant and a longtime critic of Fannie Mae and Freddie Mac. More likely, he said, are lesssweeping moves to calm rattled debt investors.
Those include having the Federal Reserve or Treasury Department lend money to the companies. A government purchase of shares, he said, is “the step of last resort.”
The Federal Reserve declined to comment on whether Fannie Mae or Freddie Mac might have tapped its emergency lending facility.
The Fed in mid-July said the mortgage giants would be permitted to draw overnight loans directly from the Fed if they needed to shore up their financial positions. There have been no indications, however, in weekly reports from the Fed that the companies have tapped such funds.
Investment banks also have been allowed to borrow from the Fed’s emergency lending program since mid-March.
The Fed’s decision to extend this privilege, which for years was open only to commercial banks, represented the broadest expansion of its lending powers since the 1930 s. The identity of borrowers tapping the Fed’s facility is not public.
Brian Faith, a Fannie Mae spokesman, said in an e-mailed statement that the company “continues to exceed our regulatory capital requirements.... We continue to provide stability and liquidity to the housing market and we will continue to play a key role as the market recovers from this cycle.”
Freddie Mac spokesman Sharon McHale said the Barron’s article “significantly overstates Freddie Mac’s financial situation” and said the company is “financially sound.” Information in this article was contributed by Martin Crutsinger and Jeannine Aversa of The Associated Press.