Fannie and Freddie Shares Fall by as Much as 50 Percent

[Gman]

Source: NY Times

WASHINGTON — Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, plummeted again on Friday morning, as senior Bush administration officials consider a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, according to people briefed about the plan.

Fannie Mae stock was down 36 percent in early trading compared with Thursday’s closing price; Freddie Mac stock was down 41 percent

Fannie Mae and Freddie Mac have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.
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The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders. In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books. (my emphasis)

Read more: http://www.nytimes.com/2008/07/12/business/12fannie.html?_r=1&hp&oref=slogin

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In a related story from Reuters via Yahoo Finance:

Reuters
Stocks extend slide after Paulson comments
Friday July 11, 10:35 am ET

NEW YORK (Reuters) - Stocks extended losses on Friday after Treasury Secretary Henry Paulson offered no hint of an imminent government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).

http://biz.yahoo.com/rb/080711/markets_stocks.html

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This could be catastrophic. This may be the other shoe dropping now. And the government can't bail anybody out because it just doesn't have the money. Another article says the bailout would be to the tune of $5 trillion which would double the public debt.

...and oh, yeah! It's a mental recession.

[enid602]

1. privatized

Why the Hell were they privatized in the first place? Other than to make it easier to cook the books, of course. Look for some shady goings-on with these two companies.

[Gman]

2. No doubt they were privatized because

there was a ton of money to be made for somebody.

[ixion]

3. funny thing... when this happens elsewhere they call it "nationalizing"

a slur meant to demean. Here, though, they use the less charged "take over".

Just an interesting semantic distinction, I thought.

[joeglow3]

6. Slight distinction

When other nations take them over, it is usually profitable ventures that are nationalized.

[Turbineguy]

4. Jimmy Cramer sez...

"The Bush Administration hates these organizations" and would just as soon see them flushed down the toilet. These are vestiges of Democratic policies.

Since they have never thought out the full implications or consequences of any of the things they've done before, it could very well be the end of the mortgage industry as it has existed for many years. That may open the door for a healthier model.

But it proves that government has to play a vital role in regulating the financial industries in order to protect them from the natural swings of "free market" capitalism.

[Gman]

5. The problem becomes

there would essentially be no mortgage industry which means no houses sold, no new houses built and the residential real estate market collapses because there are no borrowers/buyers.

If there are no borrowers or buyers, the value of everyone's home goes to $0.00. There is no more equity in homes. There is no more home equity market.

[Turbineguy]

7. I don't think that will happen

There are other solutions and there are opportunities for those who put them into action.

The important thing is for people to realize that this is just another of so many things that the Republicans have destroyed.

[joeglow3]

9. Then I will own ass tons of houses

If they are worth $0, I will buy all the homes I can for $10 each.

[Doctor Cynic]

8. Somehow lost 550k shorting Fannie

Granted it was fantasy money, but ooops. :P