THE ECONOMY

Investors are betting that time is running out for Fannie Mae and Freddie Mac.

Shares of the mortgage finance companies lost more than a fifth of their value on Wednesday as fears mounted that the companies will soon need government support and any bailout would hang stockholders out to dry.

Since Monday, stock in the two companies – which together hold or guarantee half the U.S. mortgage debt – have plunged nearly 40 percent and are now trading at lows not seen in nearly two decades.

“There’s a big negative feedback loop and there’s no way out of it,” Friedman, Billings, Ramsey & Co. analyst Paul Miller said in an interview. “As the stock falls more and more, it’s more likely the government steps in and more likely equity holders get wiped out.”

Fannie Mae’s chief executive sought to reassure investors that no bailout is imminent.

“They haven’t offered anything and we haven’t asked for anything,” Fannie Mae CEO Daniel Mudd said in a public radio interview Wednesday morning. “I don’t anticipate that they will do that.”

Armando Falcon, who served for six years as Fannie and Freddie’s chief government regulator, expects a full-fledged government takeover before year-end. The companies’ financial picture is far worse than they have acknowledged, he said, particularly for riskier loans they purchased as investments.

“They can’t keep playing games with the accounting rules to avoid taking their losses,” Falcon said.

The first intervention, he said, is likely to be government support for sales of the companies’ debt. After that, he said, “everything quickly snowballs.”

The two government- sponsored companies are the largest source of funding for home mortgages in the U.S. But they have struggled with soaring losses from mortgage defaults. Washington-based Fannie Mae and Freddie Mac have lost a combined $3.1 billion between April and June, and investors fear the losses will continue to grow.

From wire reports