Fannie, Freddie Stocks Dive; Barron's Article Weighs

NEW YORK (Reuters) - Shares of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) plunged more than 12 percent on Monday as growing concerns about the financial stability of the two companies caused investors to shed holdings.

Fanning the flames of already bearish sentiment surrounding the two government-sponsored enterprises was a Barron's cover story that said Fannie Mae, the largest U.S. home funding company, could face large losses as the housing market continues to crumble.

While the emphasis of the article was on Fannie Mae, shares of rival Freddie Mac, the No. 2 U.S. home funding company, fell as well.

"The Barron's article was certainly not positive for their stocks," said Fred Cannon, an analyst at Keefe, Bruyette & Woods in San Francisco, California.

"Today's price action is due to a combination of things, however, with the spread on their mortgage bonds spooking people a bit and there is also continuing concern about their capital positions," he said.

Fannie Mae shares on Monday were down $2.86, or 12.56 percent, at $19.91 on the New York Stock Exchange.

Freddie Mac shares on Monday were down $2.44, or 12.42 percent, at $17.21 on the New York Stock Exchange.

"Our own view is that the GSEs are critically important to the financial markets, and any thoughts that they could just go away are completely mistaken," Cannon said.

"Should anything happen to them, we think the government would recognize and support the institutions," he said.

The U.S. mortgage-backed securities Fannie Mae and Freddie Mac guarantee continued on their cheapening path on Monday, with yield spreads resuming their widening against Treasuries.

The yield premium on Fannie Mae MBS paying 5.50 percent interest compared with the 10-year Treasury note is trading at 2.324 percentage points on Monday from 2.17 percentage points on Friday, according to Reuters data.

The spread hit the widest closing level in more than 20 years on Thursday, at 2.37 percentage points.

"There is a lot of chatter about the Barron's article, but there has also been a lot of originator selling and that has been weighing on the market as well," said Walter Schmidt, senior vice president of structured product strategies at FTN Financial Capital Markets in Chicago.

(Reporting by Julie Haviv; Editing by Jonathan Oatis)