Fannie, Freddie stocks struggle

WASHINGTON – Shares of Fannie Mae and Freddie Mac tumbled Wednesday amid continuing fears the mortgage finance companies will be forced to sell more new shares than anticipated to compensate for losses from the housing slump.

The two government-chartered companies have been operating under a cloud of uncertainty in recent weeks, and their shares have plunged to levels not seen since the early 1990s.

Freddie Mac shares fell $3.20, or 23.8 percent, to $10.26 Wednesday after earlier sinking to a 16-year low of $9.88. Shares of Fannie Mae fell $2.31, or 13.1 percent, to $15.31.

“There’s a lot of nervousness about whether or not they have adequate capital to withstand the credit crisis,” said Fox-Pitt Kelton analyst Howard Shapiro, adding that he is “pretty comfortable” that the companies’ planned and completed capital-raising efforts will be enough to offset losses on defaulted mortgages

Others on Wall Street are more anxious. Reflecting those worries, Fannie Mae had to pay a record-high cost to complete a $3 billion debt offering Wednesday.

The two-year offering, one of the primary ways the company raises money to fund purchases of home loans, will pay investors a 3.72 percent yield, or 0.74 percentage points above the comparable Treasury securities. That was the widest spread since the two-year offering started in 2000.

Earlier in the week, concerns surfaced that an accounting rule change would force Fannie and Freddie to raise as much as $75 billion in new capital. While those concerns subsided Tuesday amid reassurances from the companies’ chief government regulator, fears remain that housing troubles will continue to worsen, forcing Fannie and Freddie to sell so many shares that existing investors would see the value of their existing stake decline.

While the government is widely expected to stand behind Fannie and Freddie’s debt should the companies be unable to meet their obligations, analysts say shareholders could be wiped out in the event of a severe crisis.

Investors are finally realizing that the housing market’s troubles are not confined to subprime loans made to borrowers with poor credit and will increasingly affect loans bought or guaranteed by Fannie and Freddie, said Joshua Rosner, managing director of research firm Graham, Fisher & Co.

“There’s an increasing recognition that as they have to raise capital, investors are going to be diluted,” Rosner said.