Fannie and Freddie could spell double trouble for US mortgage market

14 July 2008 / by Rebecca Sargent
Key US mortgage players Fannie Mae and Freddie Mac are currently holding the weight of the US housing market on their shoulders, as they wait for news of Government intervention after reports that their shares fell as much as 50 per cent in just one week.

Both Fannie Mae and Freddie Mac play a central role in the US housing finance system. Between them they account for more than half of America's $12,000billion of outstanding home loans. Consequently, the future of the US housing market is in their hands.

And, as the US housing and mortgage markets are already suffering at the hands of the credit crisis which is also hitting UK shores, the US Treasury and Federal Reserve are frantically attempting to find ways to protect the two mortgage moguls against potential insolvency.

If Fannie Mae and Freddie Mac were to crash, the US housing market could quickly follow suit, spelling disaster for the US economy which could equally impact the UK and other nations. Therefore it is inherent that Fannie Mae and Freddie Mac receive sufficient funds to buffer the damage and raise consumer confidence and subsequently their dwindling share prices.

US Treasury secretary, Henry M. Paulson, Jr. issued a statement commenting that: "Our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission.

"We appreciate Congress' important efforts to complete legislation that will help promote confidence in these companies. We are maintaining a dialogue with regulators and the companies. The Office of Federal Housing Enterprise Oversight (OFHEO) will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission."

The US Government was last night close to injecting $15billion into Fannie and Freddie as it attempted to avert disaster. The rumoured move comes after Freddie Mac was forced to propose a loan of $3billion from Wall Street that is due to take place today.

Shares in Fannie Mae and Freddie Mac have fallen by an unprecedented amount in the past few days. And, as a result the US Securities and Exchange Commission (SEC) yesterday launched a probe into the manipulation of stock prices. It is feared that a similar process to what the UK calls short-selling has taken place and is to blame for the dramatic fall in value. A similar trick was used on HBOS, with similar, but less dramatic, results earlier this year in the UK.

Both Freddie Mac and Fannie Mae have defended their financial positions in response to the rumours and speculation. Freddie Mac stated: "The company (Freddie Mac) is adequately capitalized, has a large liquidity portfolio and access to the world's debt markets."

Meanwhile, Fannie Mae issued a statement saying: "We are maintaining a strong capital base, building reserves for our credit losses, and generating solid revenues as our business continues to serve the market. We also have access to ample sources of liquidity, including access to the debt markets."

Both statements point to foul play as a key factor in the fall of shares in Fannie Mae and Freddie Mac, but time will tell as the latest results are due to be revealed for each company in the next few weeks.

© Fair Investment Company Ltd