Freddie Mac and Fannie Mae Rocked by Liquidity Concerns

By Jennifer Yousfi
Managing Editor

Investor worry over the solvency of U.S. mortgage-giants Freddie Mac (FRE) and Fannie Mae (FNM) have gutted the stocks over the last few days more than halving their market capitalizations.

News of a possible government-sponsored bailout sent Freddie Mac and Fannie Mae shares plunging yesterday (Thursday) dangerously close to new 52-week lows.

Freddie Mac shares sank $2.15 yesterday, a 20% decline to close at $8.11. Freddie Mac is down 76% year-to-date as of Thursday’s close.

Fannie Mae stock had a similar fate, shedding $1.95, an almost 13% to decline to close at $13.36. Fannie Mae shares are down nearly 67% year-to-date.

Rocketing foreclosure rates are only serving to exacerbate the problems of the largest U.S. lenders as one in every 501 households was at some stage of the foreclosure process in June, industry watch-dog RealtyTrak announced yesterday.

"The foreclosure problem is getting worse and will stay with us well into the next decade," Mark Zandi, chief economist for Moody's (MCO) in West Chester, Pennsylvania, said in an interview with Bloomberg News. "The job market is eroding and homeowners have less equity. Lenders are much less willing to work with you if you've got negative equity, and you're more likely to give up your house if you're deeply underwater."

U.S. Treasury Secretary Henry Paulson tried to reassure investors about Freddie Mac and Fannie Mae yesterday, saying both firms remain "adequately capitalized," The New York Times reported.

"Fannie Mae and Freddie Mac are also working through this challenging period," Paulson said early in his testimony before the House Financial Services Committee. "They play an important role in our housing markets today and need to continue to play an important role in the future."

But former St. Louis Federal Reserve President William Poole questioned the solvency of Freddie Mac and Fannie Mae, saying the government might need to step in to rescue the struggling lenders.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole, who left the Fed in March, said in the interview Wednesday, Bloomberg reported.

Poole has long been a critic of Freddie Mac and Fannie Mae, saying as early as 2003 that the companies would not be able to weather a serious market destabilization.

While the two firms are considered government-sponsored enterprises, neither Freddie Mac nor Fannie Mae receives funding from the U.S. government. Likewise, the government does not guarantee any debt-issued by the firms.

"At some point we're going to reach that inflection, where the government is going to have to either guarantee explicitly or Fannie and Freddie are going to have be left to fend for themselves," Peter Boockvar, an equity strategist at Miller Tabak & Co. in New York, said in an interview with Bloomberg Television. "We're getting to that point where a decision has to be made by Washington."

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