Published on Reuters
JULY 10, 2008 / 10:17 AM
NEW YORK (Reuters) – Investors fled from stocks and bonds of U.S. mortgage giants Fannie Mae FNM.N and Freddie Mac FRE.N for a second day on Thursday as fears mounted over their ability to raise capital needed to survive.The maelstrom raised concern Washington and the White House pressed for regulatory reforms, which it said would buoy confidence in the companies that own or guarantee nearly half of all U.S. home loans.
The congressionally chartered companies are considered the last bastions of support for the U.S. housing market, which is suffering its worst downturn since the Great Depression.
Shares in both companies have plunged throughout the week and on Thursday hit their lowest since 1991, severely limiting their ability to raise the capital they will need to purchase home loans and hold down mortgage rates. Freddie Mac shares plunged 22 percent to $8 and Fannie Mae stock lost 13.8 percent to close at $13.20.
Both top presidential candidates voiced their concerns and Federal Reserve Chairman Ben Bernanke said the companies could do a better job with stronger supervision and more capital.
“There’s an awful lot of sheer panic,” said Charles Lieberman, chief investment officer at Advisors Capital Management, in Paramus, New Jersey. “I’m afraid to step in front of the freight train” of stock selling, he said.
The relative values of their bonds fell to the lowest levels since the days before the Federal Reserve’s orchestrated bailout of Bear Stearns Cos. in March.
Attempts by the companies, government and some Wall Street players to shore up confidence by underscoring their capital adequacy had little effect. But the regulator, the Office of Federal Housing Enterprise Oversight, said after the market close that the companies also have access to credit and large portfolios of easily traded assets.
BAD TIMING
Anxiety has been high all week, but a report in the Wall Street Journal on Thursday intensified the stocks sell-off. It said Bush administration officials were meeting with regulators to discuss contingency plans should the companies be unable to raise funds.
Further stoking concerns, former St. Louis Federal Reserve President William Poole said the two mortgage finance companies were “insolvent” and may need a government bailout, according to Bloomberg News.
The companies have lost more than $11 billion in the current housing market downturn.
They are expected to need billions of dollars in capital to support their balance sheets to try to stabilize the mortgage market. The two have attracted strong demand, raising some $20 billion since late last year, but their falling share prices since then raise doubts about new investor support.
“This is not an opportune time to have to increase liquidity with the stocks down so much,” said Alan Lancz, president of investment advisory firm Alan B. Lancz & Associates in Toledo, Ohio. “These dilutive deals these companies are putting together are just increasing that downward spiral within the financials, not even to mention the confidence in the whole system.”
FOREIGN SUPPORT
Freddie Mac has disappointed investors by not raising the $5.5 billion in capital it announced in May. The company “absolutely” has enough capital, and will raise more depending on market conditions, a spokeswoman said.
Mounting doubts over the ability to raise capital led Deutsche Bank analyst Mustafa Chowdhury, a former Freddie Mac executive, to suggest during a conference call on Wednesday the possibility the companies’ stock prices could go below $5.
For the unsecured “agency” bonds, much depends on the continued support of foreign central banks that have been loading up on the companies’ $1.6 trillion in outstanding debt, a Deutsche Bank trader said on the call.
Lawmakers have been pushing hard on Fannie Mae and Freddie Mac to expand their might in the U.S. housing market, underscoring the companies’ importance while steering clear of direct reference to investor confidence.
“They play an important role in our housing markets today and need to continue to play an important role in the future,” Treasury Secretary Henry Paulson told Congress on Thursday.
Presumed Republican presidential candidate Sen. John McCain told reporters the two companies “cannot and will not fail,” promising that “we will do what’s necessary” to keep the companies afloat. However, he later added that the time for a bailout may not be now.
An adviser to Sen. Barack Obama, the presumed Democratic presidential candidate, said “we must maintain the flow of capital for mortgages.”
Prominent investors, including Dan Fuss, who as vice-chairman of Boston-based Loomis Sayles helps oversee $100 billion in assets, said they were confident the government would not let Fannie Mae and Freddie Mac fail. Fuss bought the unsecured debt obligations of the companies on Thursday
Yields on the 10-year “agency” bonds issued by Fannie Mae and Freddie Mac ballooned as much as 12 basis points to more than 1 percentage point above government debt. They closed the session just 3 to 5 basis points wider.
The mortgage-backed securities issued and guaranteed by the GSEs were more insulated since payments on the issues flow directly from homeowners to investors.
Additional reporting by Richard Leong, Dena Aubin, Deborah Jian Lee, Lynn Adler and Jennifer Ablan in New York, and Patrick Rucker and Matt Spetalnick in Washington; Editing by Dan Grebler
