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Fannie, Freddie concern renewed

The Baltimore Sun

NEW YORK - Fresh concerns about the troubled housing and mortgage markets were triggered yesterday by speculation that the government will be forced to bail out Fannie Mae and Freddie Mac, the twin pillars of the home loan industry.

Analysts worry that the mortgage giants won't be able to raise enough money from investors to cover rising losses from loan defaults. Those doubts have ramped up a sell-off by investors, sending shares of both companies to 17-year lows.

Both companies are vital to the housing market, and the government is considered likely to step in to avert any potential failure through loans or guarantees of their debt. But the steep plunges in their stocks - Freddie Mac has fallen 50 percent in just the past week - underscores the potential for the housing downturn to extend well into next year.

"It reflects the severity of the housing crisis and the dire state of the financial system," said Martin Fridson, head of money management firm Fridson Investment Advisors in New York.

"In contrast to the more hopeful sense of a couple months ago, the sense among investors now is that the housing crisis and difficulties in the financial system will drag on."

Fannie and Freddie were chartered by the government but are private companies with publicly traded stocks. They buy or guarantee home loans and mortgage securities, and together stand behind almost half of the nation's mortgage debt.

Their importance to the housing market has only increased in the past year as banks and others who bankrolled mortgages have pulled back after suffering deep losses on subprime home loans.

Top officials in Washington tried to calm fears yesterday by downplaying the odds that Fannie and Freddie would have to raise money. Treasury Secretary Henry M. Paulson Jr. told the House Financial Services Committee that both companies are adequately capitalized.

Nevertheless, any capital raising would dilute the ownership stakes of existing investors, and the stocks have fallen with remarkable alacrity in recent days. Yesterday, Fannie Mae shares tumbled $2.11, or 13.8 percent, to $13.20. It has lost a third of its value in the past week. Freddie Mac's stock sank $2.26, or 22 percent, to $8.

Richard Hofmann, an analyst at research firm CreditSights Inc., said investors are concerned that losses from loans could grow worse.

"You're talking about a gargantuan amount of exposure," he said.

Since late last year, Fannie Mae has raised more than $15 billion, and Freddie has raised $6 billion with plans for $5.5 billion more, Hofmann said. But the plunge in the stocks makes it difficult to draw cash from private investors.

Freddie's total stock market value has sunk to less than $5.2 billion, meaning shareholders would lose half their ownership stake if the company raised the $5.5 billion it seeks.

Financial companies have raised more than $320 billion in capital in the past year, but many of the investors have lost money as the stocks have continued to slide. That has raised doubts about whether companies can raise billions more.

The steep drops in share price of the two mortgage companies has "probably made it much more likely that the government is going to have to do something," said Steve Persky, chief executive of Dalton Investments, a Los Angeles-based hedge fund firm.

Concerns about Fannie and Freddie were stoked in part by comments from William Poole, former president of the Federal Reserve Bank in St. Louis, who said the firms are "insolvent" and may need government help.

Some experts on Wall Street thought the uproar over Fannie and Freddie was excessive and that the level of fear signaled that the stock market's recent tumble could be nearing an end.

"This is what characterizes the bottoms of markets," said Sean Mathis, managing director at Miller Mathis & Co., a New York investment bank. "People are throwing away everything."

Walter Hamilton and Maura Reynolds write for the Los Angeles Times.

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