Us Mortgage Giants Hit Hard

Sun Herald

Sunday July 13, 2008

By Rob Lever Washington

UNITED STATES mortgage finance giants Fannie Mae and Freddie Mac were pushed to the brink of a stock meltdown yesterday on heightened concerns about the viability of the firms that underpin trillions of dollars in home loans.

In highly volatile trade on the New York Stock Exchange, Freddie Mac plunged 51 per cent and Fannie Mae 49 per cent, but recovered ground after comments from US officials and a key US senator. At one point, shares were up nearly 8 per cent.

At the close, Freddie's shares had lost 3.1 per cent to $US7.75 ($8.05) and Fannie's 22.4 per cent to $10.25. The shares of both have plunged about 75 per cent since the start of the year.

Analysts said their size meant any hint of trouble could send shockwaves through markets and the economy.

"Allowing these entities to fail, or even to let things get to the point of it becoming difficult for them to get additional financing in order to continue their operations in the mortgage market would be ... devastating to the US, and indeed the global, financial markets," said Brad Sorenson at Charles Schwab & Co.

As the markets were falling, US Senate banking committee chairman Christopher Dodd said: "There is sort of a panic going on today, and that's not what ought to be. The facts don't warrant that reaction, in my view. These institutions are ... fundamentally sound and strong."

Senator Dodd said he had spoken with the chiefs of the two companies as well as US Treasury Secretary Henry Paulson and Federal Reserve chairman Ben Bernanke.

The latest action came following a report that the US Government could put the firms in receivership, which would make their shares worthless.

The New York Times said US President George Bush was weighing the possibility of having to place one or both companies in a conservatorship to protect them from the collapse of the US mortgage finance market.

The two firms said in separate statements they were "adequately capitalised" despite the swirling market fears that pounded their shares.

Freddie Mac said it was not on the threshold of conservatorship "because we are adequately capitalised."

Fannie Mae said: "We are maintaining a strong capital base, building reserves for our credit losses, and generating solid revenues as our business continues to serve the market."

Freddie Mac has a loan portfolio of $US1.5 trillion and Fannie Mae's is more than $US700 billion. Together they own or guarantee some $US5.2 trillion in loans, or about 40 per cent of the total value of home loans in the US.

Joel Naroff, an economist at Naroff Economic Advisers, said the two entities were being hurt by investor panic about their prospects.

© 2008 Sun Herald

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