Fannie, Freddie Down On Barron’s Report Of Tsy-Bailout Talk
Last Update: 8/18/2008 10:44:30 AM
By Aparajita Saha-Bubna
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)–Fannie Mae (FNM) and Freddie Mac (FRE) shares are each down
more than 8% on Monday, on the back of a news report signaling a higher
likelihood of a federal bailout that will leave existing stockholders with
nothing.
Fannie shares are down 9.6% recently, to $7.15, and Freddie’s stock dropped 8.9%
to $5.33.
Financial weekly Barron’s said it is increasingly likely the U.S. Treasury will
recapitalize the two mortgage finance giants, a move that will render the
holdings of existing shareholders worthless.
The news article is “rehashing old issues and concerns that people have with
these companies,” said Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran
Caronia Waller.
Congress last month gave the Treasury authority to make loans to Fannie or
Freddie or buy shares in them, and some analysts say they think the Treasury
eventually will have to shore the pair up by acquiring sizable equity stakes.
During the past four quarters, Fannie and Freddie have posted combined losses of
about $14 billion, eating deeply into their relatively meager capital holdings.
Losses are turning out worse than generally forecast largely because home prices
have fallen more steeply than expected. That means Fannie and Freddie recoup less
money from sales of foreclosed homes.
The two companies acquire home loans from lenders and package them into
securities. They keep some of those securities and sell the rest to other
investors, earning fees for guaranteeing payments on those securities.
When people default on their home loans, Fannie and Freddie have to compensate
the holders of the mortgage securities. The two own or guarantee more than $5
trillion of U.S. home mortgages, or nearly half the total outstanding.
A spokesman at Fannie declined to comment, while a Freddie spokesperson was
unavailable for comment.
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