Fannie and Freddie Shares Plunge: Can We Have a Great BIG "WHO COULD HAVE KNOWN?"

http://www.nytimes.com/2008/07/08/business/08fannie.html?hp Fannie and Freddie Shares Plunge Article Tools Sponsored By By REUTERS Published: July 8, 2008 Shares of Fannie Mae and Freddie Mac, the largest providers of funding for United States home mortgages, plunged Monday on concern the companies need to raise more capital amid larger-than-expected losses. The corporate “federal agency” debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said. Freddie Mac stock tumbled more than 21 percent in early afternoon trading to $11.42, while Fannie Mae shares dropped 20 percent to $15.01. Concern that Freddie Mac could see greater losses from mortgage insurance was fueled on Monday after the research firm CreditSights said the mortgage insurer Radian could face more downgrades, forcing it to wind down its existing business. That increases risks for Freddie Mac, which had $63 billion of loans or pools of loans backed by Radian as of March 31. The exposure to the mortgage insurer weakens the position of the government-sponsored enterprises that have been called on by Congress to do more to stabilize the housing market that analysts don’t expect will worsen into 2009. “Fannie Mae and Freddie Mac are ground zero for mortgages,” said Steve Persky, chief executive at Dalton Investments in Los Angeles. “They’re the largest leveraged owners of mortgages out there, and that’s not a good position to be in right now.” Greater-than-expected losses and share declines at Freddie Mac would make it more difficult for the McLean, Va.-based company to raise capital it needs to continue its business of buying and guaranteeing a huge chunk of American mortgages, said James McGlynn, a portfolio manager at Summit Investment Partners in Southlake, Tex. A pending accounting change could also force Freddie Mac and Fannie Mae to boost capital by an additional $29 billion and $46 billion, respectively, according to Lehman Brothers. A Freddie Mac spokeswoman on Monday said the company does not intend to raise capital until it announces second-quarter earnings, and declined to comment on the ability to raise capital as shares fall. The timing disappointed analysts since the company announced in May it would raise $5.5 billion.