Investors continued to dump shares of Fannie Mae and Freddie Mac this week amid growing fears that the government will be forced to bail the companies out. While a bailout could wipe out shareholders and be costly to taxpayers, it would allow the mortgage finance companies to continue purchasing and guaranteeing loans.

To avoid a bailout, Fannie and Freddie must refinance $223 billion in bonds that are coming due at the end of September, Bloomberg reported. Investors are still willing to finance both companies’ debt by purchasing bonds — which, unlike common stock, will not be worthless in the event of a government bailout. But Fannie and Freddie are paying higher returns on the bonds, increasing the cost of "rolling over" their debt.

Freddie Mac said it priced the sale of $3 billion in five-year reference notes Monday at 4.172 percent, a 113 basis point spread above U.S. Treasurys. Bloomberg said the spread was the highest in 10 years, and compared with a 69 basis point spread on a similar sale in May. Freddie Mac said it’s issued $39 billion in reference notes this year and has approximately $260 billion in similar debts outstanding.

PIMCO managing director Bill Gross predicts the Treasury Department will probably need to buy $30 billion in Fannie and Freddie preferred shares by the end of September, Bloomberg said. The Bush administration and Congress gave the Treasury Department a virtual blank check to keep Fannie and Freddie’s doors open as part of the Housing and Economic Recovery Act of 2008, a sweeping housing bill signed into law last month (see Inman News story).

The Wall Street Journal reported that Freddie Mac executives were to meet with Treasury officials today, a report the Treasury would not confirm.

Fannie Mae also sold $2 billion in notes today at higher interest rates than a week ago, Reuters reported. Fannie CEO Daniel Mudd said in a radio interview that the company has not asked for help from the Treasury.


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