Fannie, Freddie Shares Plummet on Capital Worries
July 8th, 2008If you felt the earth shaking under your feet today, this might have been the cause.
Via: Reuters:
Fannie Mae and Freddie Mac shares plunged to their lowest in nearly 16 years on Monday while costs to insure their debt against default rose on concern the two largest U.S. mortgage funders may need to raise vastly more capital amid larger-than-expected losses.
Corporate “federal agency” debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors reduced positions in response to the latest worries, analysts said.
Monday’s carnage was only the latest setback for Fannie Mae and Freddie Mac, which each have lost more than three-quarters of their stock market value since last August when a crisis initially believed contained to the subprime mortgage market erupted into a global credit crisis.
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The shares crumbled after a Lehman Brothers report said a pending accounting change could force Freddie Mac and Fannie Mae to raise an enormous amount of capital at a difficult time. The rule aimed at forcing companies to account for securitized assets on their balance sheets could mandate Freddie Mac and Fannie Mae to boost capital by $29 billion and $46 billion, respectively, the analysts wrote in a client note on Monday.
In a caveat, Lehman’s analysts, led by Bruce Harting, said the companies may get exemptions given the gravity of the impact on the fragile U.S. housing market.
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“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.”
