by Frank James
Some days seem more dangerous to the nation's economy than others.
Today is one of those days with rampant worries that Fannie Mae and Freddie Mac, the two government-sponsored entities (GSEs) that provide essential support to the nation's entire mortgage industry, could be nearing the need for a government bailout.
Such concerns have sent their stock prices reeling with Freddie's falling precipitously today. The turmoil caused Treasury Secretary Henry Paulson to publicly state that the Bush Administration's desire is to keep the two companies in their present form.
The Associated Press is reporting the following:
The pair hold or guarantee around $5 trillion worth of mortgages. That's roughly half of the $9.5 trillion debt of the United States. The fear is that a failure of one or both would wreak havoc on the nation's financial system and the broader economy as well.
Paulson's comments came amid reports that the government was considering a plan to take over one or both of the companies and place them in a conservatorship.
The Treasury chief said his department is "maintaining a dialogue with regulators and with the companies." The companies' main regulator, the Office of Federal Housing Enterprise Oversight, will continue to work with the Fannie Mae and Freddie Mac "as they take the steps necessary to allow them to continue to perform their important public mission," Paulson said.
Shares of the companies' stocks have plunged in recent days, with Freddie's down sharply on Friday as fear intensified. Investors are increasingly worried the companies will suffer more losses as housing prices keep falling and foreclosures keep rising.
And, stock investors are worried the companies will have to raise a lot more money to cover those losses. By law the companies are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.
Congress created the companies to provide a steady stream of money for home mortgages. Although the government doesn't guarantee Fannie's and Freddie's debts, most investors believe the government would come to their rescue if the companies fell into dire straits. This "implicit" guarantee allows them to borrow money at lower interest rates than other financial companies.
The worries about Fannie and Freddie come as the government is depending on them to provide much-need mortgage financing at a time when credit has gotten much harder to obtain.
Fannie and Freddie play a crucial role in providing funding for home loans by buying up mortgages and packaging them as investments. If they are unable to operate, the implications could be dire.
"Without them, our economy would collapse," Piper Jaffray analyst Robert P. Napoli said in a note to clients. Napoli lowered his target on Freddie to $9 per share from $28, and on Fannie to $15 per share from $30.
From the beginning of the credit crisis triggered by the subprime mortgage disaster, the nation's economy has been in unchartered waters full of dangerous, unknown shoals.
Freddie and Fannie haven't shipwrecked yet. But if they did, it would take the economic outlook to a whole new level of uncertainty.
• 
• 
• 
• 
Comments
Thank you, Republican economic policies. And some people want four more years of this??
Posted by: Paul | July 11, 2008 1:24 PM
Hey Gramm, still think it's "mental"?
Posted by: Todd M | July 11, 2008 1:45 PM
The Bush family resposible for another banking financial melt down just like the Savings and Loan Crisis. So sad King George served one term let alone two
Posted by: Paul Letourneaux | July 11, 2008 2:24 PM
Give me a break! You don't have to worry one bit. The Govt. will just print more money and give it free to them. The Hedge Fund in return, borrows at the Fed Rate and invest that money in oil and drives the prices up. It' s like that movie, "The Little Shop of Horror." You keep feeding it. . .and it never stops growing.
Posted by: Lou | July 11, 2008 7:13 PM
Oh, Paul L, we may hate the Bush’s, but lets not spread false information with blind hatred. The S&L Crisis had roots in the 1970’s; no Bush was in office then. Here is a published fact, when Jimmy Carter left office in January 1981, 3,300 out of 3,800 S&Ls lost money. There are a lot of things you can blame Bush for, but I am sorry, you cannot blame the Bush family for the S&L crisis.
Posted by: Joseph J | July 11, 2008 10:47 PM
FAnnie and Freddie and also Ginnie Mae have been participating in shady accounting practices for years. If you read the WSJ you would been able to read about these unethical accounting practices for 6 years now.
This debt is nowhere on the gov't books. So canidate BO wants to expand gov't programs by providing more and more and therefore run up the "real debt"
As folks in here complained about EnRon's Ken LAy, and rightfully so, Franklin Raines who used to run Fannie Mae would use these bogus accounting practices in order to boost profits which would bump up the profits. Along with Jamie Gorelick who was a vice-chariman (you might remember Jamie from the 9-11 commission and the Chinese Wall) and finally Jame Johnson - you know part of BO's VP vetting committee.
http://online.wsj.com/article/SB121565255349741343.html
http://usatoday.printthis.clickability.com/pt/cpt?action=cpt&title=Taxpayers+on+the+hook+for+%2459+trillion+-+USATODAY.com&expire=&urlID=22497149&fb=Y&url=http%3A%2F%2Fwww.usatoday.com%2Fnews%2Fwashington%2F2007-05-28-federal-budget_N.htm&partnerID=1660
http://www.heritage.org/Research/GovernmentReform/bg1861.cfm
Posted by: Terry | July 12, 2008 8:01 AM