The speculation swirling around mortgage giants Fannie Mae and Freddie Mac - whether they're in danger, whether the government might have to take them over - is one more blow to an already battered housing market.
With jittery investors sending shares of the companies plummeting, the Bush administration moved yesterday to ease fears that a takeover was necessary or imminent. Treasury Secretary Henry M. Paulson Jr. said the government would instead be "supporting" the companies in their current form as critical financiers of the loans that allow people to buy and sell homes.
Fannie and Freddie pretty much are the mortgage market nowadays: Nearly 70 percent of the country's mortgage lending activity went through them in the first three months of the year, according to trade publication Inside Mortgage Finance.
A number of large mortgage lenders have collapsed since last summer, and late yesterday federal regulators seized control of the $32 billion IndyMac Bank, saying the "unprecedented stress" in the real estate market had left it "unsafe and unsound."
In that climate, disruption of Fannie and Freddie would probably mean higher interest rates and even more restrictive lending standards, experts say. That's likely to some extent if the government steps in or even if Fannie Mae and Freddie Mac need to borrow more money in this environment of wary investors.
It would hardly be good news for people who want to buy or refinance a home, the many would-be sellers who can't unload their properties or the hordes of professionals whose livelihoods depend on the housing market. It would also add stress to an economy teetering near recession.
"The last thing anyone wants to see is higher rates," said Keith T. Gumbinger, a vice president at financial publisher HSH Associates. "That could induce even further downward pressure on home prices."
Hard to judge
The kicker? It's hard to judge how much trouble Fannie and Freddie are actually in, he said.
The Office of Federal Housing Enterprise Oversight, the companies' regulator, said Thursday that both were "adequately capitalized" and dealing well with difficult market conditions. But those difficult conditions have meant losses, and investors are worried that the continuing decline in home prices and rise in foreclosures could throw the companies into insolvency.
By law, the companies are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.
Both companies started the year with stock above $30 a share but have felt the impact of anxious investors, particularly this week. Freddie Mac's shares dipped as low as $3.89 yesterday morning before Paulson's statement, finally closing at $7.75.
Sen. Christopher J. Dodd, a Connecticut Democrat and the Banking Committee chairman, said Paulson and Federal Reserve Chairman Ben Bernanke told him yesterday that they are "looking at various options" for propping up the firms if they ultimately need help.
These include giving them access to the Fed's emergency lending program, Dodd said - much as the Fed did in March for Wall Street firms buffeted by the ripple effect of mortgage defaults.
Fannie and Freddie are unusual animals, publicly traded but known as "government-sponsored enterprises" because they owe their existence to Congress. Fannie Mae was created during a flurry of Great Depression financial reforms, and Freddie Mac followed in 1970 to keep money flowing between banks and mortgage borrowers.
The companies buy mortgages from lenders - allowing the lenders to plow that money into new loans - and then they sell securities backed by those mortgages to Wall Street.
After lax lending standards and housing-market turmoil triggered bankruptcies among mortgage companies last year, Fannie and Freddie were asked by the government to expand their reach - further exposing them to risks.
John Bancroft, executive editor of Bethesda-based Inside Mortgage Finance, said he assumed two weeks ago that they would muddle through 2008 and eventually turn a corner. End up in government "conservatorship"? No way.
But he's not making predictions anymore. The problem with rising investor concern is that it drives up the cost for the companies to borrow money, because people want higher interest rates to make up for perceived higher risk.
Perhaps Fannie and Freddie will be able to take that in stride, Gumbinger said. But those higher costs would ripple down to new borrowers, he said, and so too might more restrictive lending rules. A government takeover would make it even worse, Bancroft thinks.
Brett Carter, president of Next Generation Financial Services, a division of Baltimore-based 1st Mariner Bank, doesn't think it will come to that. He sees the investor unrest as nothing more than the lack of confidence the country has in all financial firms right now. But he agrees that the pressures on the companies could push up mortgage rates.
"It's a challenging time in the financial services sector," Carter said.
The National Association of Realtors has frequently weighed in about the impact of mortgages on the housing market. But it wasn't looking to raise any more concerns yesterday.
"What we've got here are two companies with rumors circulating widely, the regulators saying they're both solvent and liquid," said Jed Smith, managing director of quantitative research for the trade group. "And we don't really have any evidence to the contrary, other than the fact that people are very upset. We've got a lot of upsettedness these days."
The Associated Press contributed to this article.