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.
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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