Fannie, Freddie and Angelo

Investors are getting nervous about mortgage repurchasers Fannie Mae and Freddie Mac's exposure to subprime mortgage loans and collateral damage from delinquencies and foreclosures on prime loans.

The six-month chart at left (click to enlarge) shows Fannie and Freddie's stock prices are beginning to follow those of Angelo Mozilo's troubled Countrywide Financial down. (Fannie, in red, is down about 35 percent since June, while Freddie, in blue, has lost nearly 40 percent in value. Both stocks started to go downhill in October. Countrywide, in green, got a head start and has lost about 70 percent. For a current comparison from Yahoo! Finance, click here.).

For more on how that might worsen the credit crunch, click "Continue reading Fannie, Freddie and Angelo).

Fannie Mae, in returning to regular financial reporting in the aftermath of an accounting and management scandal, this month said profits for the first three quarters of 2007 were $1.5 billion, down from $3.5 billion during the same period a year ago. Fannie was actually in the red during the third quarter, with $1.4 billion in third-quarter losses on issues like $1.2 billion in credit losses in loans Fannie owns or guarantees and $2.24 billion in write-downs on the value of derivative contracts (see Inman News story).

Investors are worried Freddie will have similar bad news when it reports earnings tomorrow, the Wall Street Journal reports. Reuters notes that a Friedman, Billings, Ramsey & Co., Inc. stock analyst downgraded Fannie Monday, saying the stock will "trade close to book value over the next few quarters due to the uncertainty of the impact from the continued deterioration in the housing market and rising credit losses."

What do investors' worries about the government-chartered -- but for-profit companies -- mean for housing markets? Well, Fannie and Freddie have practically been the only game in town of late for mortgage lenders like Countrywide Financial Corp., who are largely unable to make loans that aren't elligible for repurchase or guarantee by Fannie and Freddie. "Private-label" securitization of mortgage loans for sale to Wall Street investors -- the source of the easy money that fueled the housing boom -- has largely evaporated.

There's been a fierce debate in Congress over whether to give Fannie and Freddie more leeway to A: buy more loans (by lifting limits on the growth in their loan portfolios) and B: buy bigger loans (by raising the $417,000 conforming loan limit). Critics say Fannie and Freddie already pose a big enough risk to the financial system, because of all the money they've borrowed to buy and guarantee loans, and shouldn't be given a shovel to dig themselves a deeper hole.

There's some question about how much of that debt is actually covered by the U.S. government. But Fannie and Freddie enjoy access to cheaper credit because of the perception that the Uncle Sam would come to their rescue if the government-sponsored entitiess (GSEs) got in trouble.

One purpose of a GSE reform bill making its way through Congress is to make it clear that federal regulators will put Fannie and Freddie in receivership if they get into financial trouble, and that their creditors shouldn't expect a taxpayer-funded bailout.

There's little talk about Fannie and Freddie being in that kind of jeopardy -- investors are concerned they won't be profitable, not worried that they'll go out of business. But as worries about the impact of Fannie and Freddie's exposure to delinquencies and defaults grows, that could make it harder to win over lawmakers who are sitting on the fence about a greater role for the GSEs.

Losses could also force the GSEs to pare back their loan portfolios, or raise money by issuing preferred stock -- not the cheapest source of funds. Fannie announced last week it raised $500 million through the sale of preferred stock with an annual dividend rate of 7.625 percent. 

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