Fannie, Freddie crisis deepens

Aug 22, 2008
Fannie, Freddie crisis deepens
With shares slumping, US govt stops insisting no rescue is needed

WASHINGTON: The United States Treasury has backed away from
assurances that there is no need to rescue Fannie Mae and Freddie
Mac, as the crisis surrounding the American mortgage finance giants
deepens, with their shares falling for a third day, the Financial
Times (FT) has reported.

Although it was granted new powers last month to prop the companies
up with a cash infusion, either through loans or by buying stock, the
Treasury had been adamant that it did not expect to use the new
authority.

On Wednesday, however, a Treasury spokesman declined to repeat that
assurance, FT reported yesterday on its website. Instead, she said
the Treasury was 'vigilantly' monitoring market developments and
was 'focused on efforts that will encourage market stability,
mortgage availability and protecting the taxpayer'.

While the companies continue to insist that their fundamental
finances are sound, investor confidence in Fannie Mae and Freddie Mac
has taken a pounding this week as speculation about a federal
government bailout gains pace in the news media and among market
analysts.

Shares of Fannie Mae and Freddie Mac tumbled more than 20 per cent on
Wednesday, hitting their lowest levels in nearly two decades, as
investors fled out of fear that a government initiative to save the
ailing mortgage giants could render their stock worthless.

The stock sell-off came a day after Freddie Mac was forced to pay an
unusually high interest rate on five-year notes to entice investors
to purchase its debt.

This week alone, both companies' shares have dropped by 44 per cent
in very heavy trading. In the past 12 months, Fannie Mae's market
value has plummeted 88 per cent, or US$34 billion (S$47.98 billion),
to US$4.73 billion. Freddie Mac's value has dropped by US$20 billion,
or 90 per cent, to $2.1 billion.

The companies have reported a combined US$14.9 billion in net losses
over the past year.

A growing chorus of industry analysts are predicting that the
government will have to intervene to prevent a further deterioration
of the firms, which own or guarantee half of the US' mortgage debt.

The two firms have been reeling as concerns mount that they may not
have enough capital to cover losses because of the rising number of
bad home loans. If Fannie Mae or Freddie Mac collapses, it may
cripple the US housing market, dealing a staggering blow to the wider
economy, and will saddle the federal government with massive debts if
it chooses to seize control of either firm.

Both companies say they have enough capital to weather the severe
downturn in the housing market.