Bailout concerns slam Freddie, Fannie shares

By Lynn Adler

NEW YORK (Reuters) - Investors dumped shares of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) on Monday after a newspaper report said government officials may have no choice but to effectively nationalize the U.S. housing finance titans.

A government move to recapitalize the two companies by injecting funds could wipe out existing holders of the largest U.S. home funding companies' common stock, the weekend Barron's story said. Preferred shareholders and even holders of the two government-sponsored entities' $19 billion of subordinated debt would also suffer losses.

Shares of Fannie Mae sank more than 22 percent to a 19-year low on Monday, closing at $6.15, while Freddie's shares plunged 25 percent to $4.39. Some of their bonds sharply underperformed Treasuries. A $4 billion sale of new Freddie Mac debt drew weak bids compared with similar issues last week.

A spokeswoman for the U.S. Treasury said the department has no plans to use its authority to backstop the two funding agencies. That authority was greatly increased by a rescue plan approved at the end of July.

"The Barron's article overstated Freddie Mac's financial situation," Sharon McHale, a Freddie Mac spokeswoman, told Reuters. "We continue to be adequately capitalized."

Fannie Mae spokeswoman Janis Smith declined to comment.

The poor performance of the U.S. mortgage market has pulled home loan rates up by about a percentage point from a year ago, just as the worst housing market since the Great Depression struggles to find a bottom.

"Investors have been trying to put the housing and credit crisis behind them. They want to believe we're in the eighth or ninth inning, but every time news like this comes up, they have to readjust their thinking," said Paul Nolte, director of investments at Hinsdale Associates in Hinsdale, Illinois.

Overseas central banks have sold nearly $11 billion from their holdings of agency-related securities in the past four weeks, awaiting clarity on the extent and nature of U.S. government backing of the two faltering companies, which are chartered by Congress to support housing by keeping money flowing in the mortgage market.

The two companies, known as GSEs, together own or guarantee more than $5 trillion in U.S. mortgages.

"There is a lot of uncertainty with what happens in terms of capital raising and a lot of investors are in a wait-and-see mode," said Rajiv Setia, analyst at Barclays Capital. "From a GSE perspective, as long as they get funding it does not matter at what price as they will just pass it on with higher mortgage rates."

The value of some of the two companies' debt that is at the biggest risk of loss in the event of a government rescue fell to a record low in comparison with similar Treasury securities. Spreads on some Freddie Mac 10-year subordinated debt widened over Treasury notes to a bid of 400 basis points and offer of 360 basis points, from a close of 285 basis points on Friday, according to one investor, citing a dealer's data.

An insider in the Bush administration told Barron's that Fannie and Freddie "are being jawboned" by the Treasury Department and their new regulator, the Federal Housing Finance Agency, to raise more equity.

But government officials do not expect the agencies to succeed, Barron's reported.

If the GSEs fail to raise fresh capital, the administration is likely to mount its own recapitalization, with the Treasury infusing taxpayer money into the agencies, according to the Barron's source.