Fannie Mae (FNM) and Freddie Mac (FRE) boomed along with the real-estate market. Now their shares are down 83 percent and 86 percent, respectively...
Fannie Mae (FNM) and Freddie Mac (FRE) boomed along with the real-estate market. Now their shares are down 83 percent and 86 percent, respectively, from a year ago, and the government is ready to step in with”quite an unprecedented measure of support,” says Victoria Wagner, S&P credit analyst. A look at what went wrong for the mortgage giants …
What do they do?
Fannie Mae, created in 1938, and Freddie Mac, founded in 1970, buy mortgages from lenders and package them into securities that are sold to investors. This frees lenders to provide new mortgages, making it easier for more Americans to buy homes. The entities hold or guarantee $5.3 trillion in mortgages, about half the country’s total, and guarantee principal and interest on the mortgage-backed securities.
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What went wrong?
Surging mortgage defaults ate away at Fannie and Freddie’s reserves. At the same time, while the mortgage market is shrinking, their role in it has become bigger, and the credit crunch has investors fearing they won’t be able to keep raising capital cheaply.
Do analysts see a recovery?
As of June 30, Fannie exceeded its capital requirements by $11.5 billion; Freddie topped them by $3.7 billion, notes Citi Investment Research analyst Bradley Ball, who rates both “buy,” saying concerns are overblown. But Goldman Sachs analyst Daniel Zimmerman rates both “sell.” He expects Fannie’s portfolio to lose $32 billion in value and Freddie’s to lose $21 billion.
How is the government getting involved?
It wants to expand their line of credit and to be able to buy their stock. The Federal Reserve is offering the pair access to emergency loans that had only been open to banks. Some fear a government bailout, which would cause the national debt to soar, potentially boosting U.S. interest rates, but Ladenburg Thalmann & Co. analyst Richard X. Bove says Fannie and Freddie are too big for such a step; their obligations would amount to more than half the nation’s debt. He’d like to see them taken private and restructured into 12 regional branches, like the Fed.