Mortgage Fears Depress Shares at Two Agencies

NEW YORK -- The Federal Reserve said Tuesday it may extend brokerages' access to direct loans and a regulator said Fannie Mae and Freddie Mac have sufficient capital, according to Bloomberg News.

Fannie Mae and Freddie Mac rallied after James Lockhart, director of the Office of Federal Housing Enterprise Oversight, told CNBC a proposed accounting change shouldn't affect capital requirements for the largest sources of home-loan financing, Bloomberg News reported.

Shares of the nation’s two most important mortgage companies plummeted Monday after falling almost continuously over the past month. In just one day, Freddie Mac tumbled another 18 percent, and Fannie Mae lost 16 percent amid concerns that the companies would need to raise billions of dollars in fresh capital, the New York Times reported.

Fannie Mae and Freddie Mac are the nation’s largest buyers of home mortgages, and traditionally the government’s backstop for the housing economy. But with Monday’s plunge, each of these giants has now lost more than 60 percent of its market value this year. The declines, along with a falling stock market and growing unease about the possibility of more red ink at big banks, reflect a growing conviction consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared, the Times said.

The decline in Freddie Mac and Fannie Mae comes at a delicate time for the financial markets, according to the Times. In coming weeks, many of the nation’s largest financial institutions -- including Citigroup and Merrill Lynch -- will report results that investors worry will be disappointing. Lehman Brothers, which some on Wall Street worry might run into trouble similar to that at Bear Stearns, continues to struggle to restore confidence among investors. Lehman’s share price fell almost 8 percent on Monday, the Times said.

But as share prices at the companies have declined, raising new funds has become increasingly difficult. Freddie Mac, for instance, announced on May 14 that it intended to sell $2.75 billion in new common stock to investors. Since then, the company’s stock price has declined by 56 percent, the Times reported.

Additionally, Freddie Mac and Fannie Mae were battered by news on Monday that their cost of borrowing, when compared to what the government pays, had increased to their widest spread since March, when it set a 22-year record, according to the Times.

-- NYSSCPA.org News Staff

Posted on 7/8/08