Fears that the government might have to bail out Fannie Mae and Freddie Mac have sent the companies’ share prices plummeting, but the turmoil in financial markets hasn’t translated into higher mortgage rates or tightened underwriting standards.

A contingency plan announced by federal regulators Sunday to provide Fannie and Freddie with access to more capital is aimed at calming investors in the companies, and the crisis may ultimately have little impact on mortgage lending or the housing downturn, analysts said.

Shares of Fannie and Freddie began a precipitous decline last week, driven by fears that the privately traded, government-chartered companies would not be able to raise enough capital to stem losses on mortgages and mortgage-related investments (see story).

The Federal Reserve Board announced Sunday that it would allow Fannie and Freddie to borrow money at the same rate banks are charged. The Treasury Department said it had approved an unspecified, temporary increase in both companies’ credit lines and will seek authority from Congress to buy shares in Fannie or Freddie if needed.

Craig Focardi, who heads up research of consumer lending and retail banking for the TowerGroup, said that if the measures shores up investor confidence in Fannie and Freddie, that could reduces the likelihood that government action will be required.

"Clearly we are in a crisis (in terms of investor confidence) with Fannie and Freddie — the question is whether these steps can prevent the government from having to formally take over" the companies, Focardi said. "In this case, I think because they are already government-sponsored enterprises, the solution has a greater chance of working than with Bear Stearns."

Unlike the failed investment bank Bear Stearns or mortgage giant Countrywide Financial Corp. — both of which were taken over by rivals when they ran short of capital — a private company can’t legally take over Fannie or Freddie if they run into trouble. The Federal Reserve and the Treasury Department are signaling that they will not allow Fannie and Freddie to become insolvent, Focardi said.

Without Fannie and Freddie, Focardi said, "The mortgage market would probably shrink to less than half of its current size, and further push the real estate and finance industries, and the overall U.S. economy, into recession."

Analysts at Goldman Sachs said that the measures, "dramatic as they look," are not a turning point for the U.S. housing market or a sign that the downturn will be much worse than previously believed, Reuters reported. The measures reaffirm the "widely shared" belief that "government will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind" Fannie and Freddie, Goldman Sachs analysts said in a research note Sunday.

Fannie and Freddie, meanwhile, issued statements saying they remain adequately capitalized, suggesting they should not need to rely on the newly announced sources of funding.

"Given the market turmoil, having options to access provisional sources of liquidity if needed will help to strengthen overall confidence in the market," Fannie Mae Chief Executive Officer Daniel Mudd said in a statement. "We will continue to do our part to provide liquidity, stability and affordability to the housing market now and in the future."

Freddie Mac CEO Richard Syron said the company expects to report second-quarter results that will show "a substantial capital cushion" above the amounts required by the Office of Federal Housing Enterprise Oversight, or OFHEO. OFHEO’s capital requirements are 20 percent greater than those set by Congress.

Some analysts believe that if Fannie and Freddie had to sell their assets today, they would be insolvent. But as long as investors are confident that they will ultimately survive, they will continue to be able to raise capital and won’t have to liquidate assets at fire-sale prices.

Freddie Mac sold $3 billion in bonds Monday, with stronger demand for the investments than a similar sale last week, Reuters reported. But shares in Fannie and Freddie continued to waver in heavy trading Monday, with investors fearing that their shares would become worthless if the government is ultimately forced to place the companies in conservatorship.

While shares in Fannie and Freddie fell last week, interest rates on the conventional, conforming mortgages they buy and guarantee dipped slightly.

***

What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
Success!
Thank you for subscribing to Morning Headlines.
Back to top