July 12 (Reuters) - Shares in U.S. mortgage finance firms Fannie Mae FNM.N and Freddie Mac FRE.N plunged this week as market speculation mounted that the government was set to take them over to resolve their funding problems.
Here are some key facts about the two companies:
— Formal name: Federal National Mortgage Association
— Created in 1938 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing.
— Annual revenue: $43.71 billion (Dec. 31, 2007)
— Chairman: Stephen B. Ashley.
— Shares touched a 52-week high of $70.57 on Aug. 22, 2007 and fell as low as $6.87 on Friday, but closed at $10.25.
— Formal name: Federal Home Loan Mortgage Corp.
— Created in 1970 by Congress as part of a campaign aimed at expanding the secondary U.S. mortgage market and increasing home ownership and rental housing
— Annual revenue: $42.91 billion (Dec. 31, 2007)
— Common stock outstanding: 646.27 million (Jan. 31, 2008)
— Chairman: Richard F. Syron.
— Shares touched a 52-week high of $67.20 on Aug. 17, 2007 and fell as low as $3.89 on Friday, but closed at $7.75.
Fannie Mae and smaller Freddie Mac are shareholder-owned companies charged by Congress with supporting housing by keeping money flowing in the mortgage market. Due to the congressional charter, the two are often referred to as government-sponsored enterprises, or GSEs.
Due largely to an implied government guarantee, they are able to raise funds relatively cheaply by selling debt to investors. The funds they raise are then used to purchase home loans from mortgage originators such as banks, allowing the lenders to make fresh home loans.
While the collapse of the subprime mortgage market, which caters to borrowers with poor credit histories, has contributed significantly to the U.S. housing slump, the vast majority of mortgages purchased by Fannie Mae and Freddie Mac are prime, fixed-rate loans on which borrowers are current.
Fannie Mae and Freddie Mac bundle the loans they purchase into securities which are sold, with a guarantee of payment, to investors worldwide. In addition, the two companies also guarantee mortgages and pay owners of the loans when there is a default.
The two companies hold some of the loans they purchase and securities they bundle in their investment portfolios. Fannie Mae said its portfolio was $736.9 billion in May, the highest since August 2005, while Freddie Mac said its portfolio was a record $770.4 billion in May.
Including investments and guarantees, Fannie Mae’s total book of business topped $3 trillion for the first time in May, twice its size at the beginning of 2002.
With Freddie Mac’s $2.2 trillion in investments and guarantees, the two have a hand in nearly half of the entire U.S. mortgage market.
As the housing market continues to deteriorate, foreclosures have spread beyond subprime loans to higher-quality mortgages. The two companies have been required to write down their loans held for investment and pay out on guaranteed mortgages that default, depleting their capital.
Fannie Mae and Freddie Mac have reported more than $11 billion in losses since the housing market bubble burst.
Contrary to many other financial institutions, Fannie Mae and Freddie Mac have never been required to hold much capital relative to their assets. That leaves them with a smaller cushion for absorbing losses.
A lack of capital also indicates they are unable to buy mortgages from lenders.
Analysts and investors expect the two companies to raise capital.
Fannie Mae raised $7.4 billion of capital in April and May by selling common and preferred shares. Freddie Mac has announced plans to raise $5.5 billion but its ability to do that by selling shares will be difficult given the sharp drop in its stock price.
The two companies’ presence in the struggling housing market is widely considered to be critical. They help keep mortgage rates low for many consumers, but the companies are struggling to balance growth through buying loans against rising delinquencies.
In 1979, Fannie Mae became insolvent as the market value of its liabilities exceeded the market value of its assets. This turned around as market factors eventually worked in the company’s favor. The U.S. government did not get involved.
The Office of Federal Housing Enterprise Oversight (For main story, please double-click on [ID:nN11322422]) (Compiled by Carl Bagh from Reuters source material, Editing by Jonathan Oatis)