Fannie, Freddie shares bounce, bailout questioned

By Julie Haviv and Al Yoon

NEW YORK (Reuters) - Fannie Mae (FNM.N) and Freddie Mac (FRE.N) shares jumped for a second day on Tuesday on growing confidence that the companies may be able to avoid a government bailout.

The shares had fallen to almost two-decade lows amid fears the two mortgage finance companies do not have enough capital to sustain themselves as the U.S. housing market worsens and that a bailout would result in their common shares becoming worthless.

The two companies, which own or guarantee nearly half of all outstanding U.S. mortgages, have reported losses for the past four quarters. But analysts at Citigroup Inc. and Goldman Sachs Group Inc. on Tuesday said options for supporting the government-sponsored enterprises without nationalizing them were not yet exhausted.

There is a "growing view that a government bailout of the GSEs is not imminent," Thomas Lawler, founder of Lawler Economic & Housing Consulting, said in a note to clients.

Shares of Fannie Mae rose 8.3 percent to $5.62, and shares of Freddie Mac jumped 20.1 percent to $3.97 on Tuesday. The stocks are at their highest levels since August 20, but are down more than 80 percent since May.

Citigroup and Goldman analysts said the Treasury may be confident the companies can stabilize themselves without an emergency capital injection. Other options, including a loosening of capital constraints on the companies, could also alleviate concern over their stability, the analysts said.

Citigroup's Bradley Ball said on a conference call that Fannie Mae and Freddie Mac have enough capital to absorb probable losses through the end of the year.

Wall Street confidence in the companies has swayed to and fro in recent days, but the Treasury and regulators continue to keep the same close eye on the situation.

On Tuesday afternoon, the chief regulator for Fannie Mae and Freddie Mac, James Lockhart of the Federal Housing Finance Board, attended a meeting at the Treasury Department to discuss the crisis facing the two companies.

"There's a lot of speculation that maybe the shareholders will get bailed out," said Mark Coffelt, chief investment officer at Texas Capital Value Funds in Austin, Texas. "So shareholders think, 'If I buy this at $3 to $5 a share and the shareholders get bailed out, I'm going to do great.'"

Mortgage investments at the companies continued to rise in July, though Fannie Mae and Freddie Mac this month indicated they would be more conservative with capital as they manage their combined $1.5 trillion in mortgage investments.

Freddie Mac's portfolio surged 14.9 percent to a record $798.2 billion in July. Fannie Mae's mortgage investments grew 14.4 percent to $758.1 billion.

But Freddie Mac said its purchase and sales agreements for future months turned abruptly, falling to negative $324 million in July from $34.7 billion in June and casting doubts in its ability to stabilize the housing market that is in its worst downturn since the Great Depression.

Shares of Fannie Mae and Freddie Mac have been pummeled on fears they would no longer be able to function, a situation that lawmakers have said would cripple the housing market since the companies are key providers of funding as banks rein in lending. In July, Congress gave the Treasury Department authority to lend money to or acquire equity in Fannie Mae and Freddie Mac if needed to prop them up.

Federal Reserve policy-makers at their August 5 meeting showed concern that the GSEs' stress was potentially worsening the housing slump, according to minutes of the meeting. Such fear fueled talk last week that a bailout, akin to nationalization, was inevitable.