Federal Reserve Chairman Ben Bernanke raised expectations of further cuts in short-term interest rates in a speech delivered Thursday, capping a week in which investors temporarily lost faith in publicly traded giants of the mortgage lending industry including Countrywide Financial Corp., IndyMac Bancorp Inc. and Freddie Mac.

Countrywide, which has scrambled to obtain funding to make mortgage loans since the secondary market for mortgages and corporate debt was disrupted last summer, was plagued by rumors that it was preparing to file for bankruptcy.

Countrywide officials denied the rumors — and then had no comment on a report in the Wall Street Journal Thursday that it is in “advanced discussions” regarding a merger with Bank of America.

Shares of Countrywide, which traded below $5 a share at times Thursday, shot up more than 50 percent on the news, closing at $7.75.

IndyMac Bancorp Inc. also benefited from the news, rising 23 percent on the day to close at $5.78. IndyMac shares tumbled this week after the alt-A lender reported increased delinquencies in its loan portfolio, and said new charges and underwriting policies being implemented by Fannie Mae and Freddie Mac could hinder future lending (see Inman News story).

Investors were also pessimistic about government-chartered mortgage financers Fannie Mae and Freddie Mac this week. Shares in Freddie Mac, which opened at $30.22 on Monday, were down more than 10 percent Tuesday before rebounding to close at $27.88 Thursday.

Moody’s Investors Service said Wednesday it was placing Freddie Mac’s A- bank financial strength rating on review for possible downgrade, because credit losses might exceed the rating agency’s previous expectations. The bank financial strength rating measures the likelihood that a financial institution will require assistance from third parties, such as the government or shareholders.

Moody’s reaffirmed Freddie Mac’s Aaa senior debt, Prime-1 short-term, Aa2 subordinated debt, and Aa3 preferred stock ratings.

In his speech to the Women in Housing and Finance and Exchequer Club Joint Luncheon in Washington, D.C., Bernanke said that recent auctions to make funds available to banks and financial institutions seem to be working better than offering short-term loans through the “discount window.”

Last month, the Federal Reserve made $40 billion available through the auctions, and plans to make $60 billion in loans at two auctions this month.

While the auctions and other actions “appear to have had some positive effects,” they cannot “fully address fundamental concerns about credit quality and valuation” or eliminate financial restraints affecting the broader economy, Bernanke said.

Although the Federal Open Market Committee has reduced the overnight federal funds rate at its last three meetings by a total of 1 percentage point, Bernanke said additional easing “may well be necessary.”

While most observers expect the Open Market Committee will lower the rate again when it meets Jan. 29, there has been considerable speculation over whether the reduction will be 25 basis points or 50.

Bernanke said the committee must “remain exceptionally alert and flexible, (and be) prepared to act in a decisive and timely manner,” raising expectations of a dramatic cut at the end of the month.

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Send tips or a Letter to the Editor to matt@inman.com, or call (510) 658-9252, ext. 150.

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