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Vol. 72/No. 30      July 28, 2008

 
House votes to bail out mortgage firms
(front page)
 
BY SAM MANUEL  
WASHINGTON, D.C., July 23—The U.S. House of Representatives approved today a plan put forward by the Treasury Department and Federal Reserve to rescue the country’s two largest mortgage companies. The bill now goes to the Senate. Since early October, Freddie Mac shares lost 83 percent of their value on the New York Stock Exchange and Fannie Mae shares lost 77 percent.

As government-sponsored entities, Fannie Mae and Freddie Mac were created to provide loans for home purchases. The two companies hold or back $5.3 trillion of the $12 trillion total in outstanding U.S. home mortgages.

Federal regulators took over IndyMac Bank July 11 in the second-largest bank failure in U.S. history.

These are the latest examples of the volatility gripping financial markets spurred by a deepening debt-driven credit contraction resulting from default losses in housing mortgages.

Bush administration officials said there are no immediate plans to take over Freddie Mac and Fannie Mae. However the proposal before Congress is to provide larger credit lines to both companies and to request authorization allowing the Treasury Department to purchase an equity stake in them if necessary. The Federal Reserve will open special lending options to the mortgage giants.

Those announcements sent shares in Freddie Mac from its opening of $4.26 July 11 to opening at $10.96 today. Fannie Mae shares rose from $7.16 to $15.50 in the same period.

Both were selling for more than $60 a share this time last year.  
 
Shaken confidence
Events at the mortgage companies and IndyMac Bank highlighted the growing skittishness of the billionaire families in the financial markets.

On July 10 a rapid sell-off of the mortgage companies’ shares began after a former central banker commented that the companies might not be solvent and a financial analyst at UBS, a major international financial firm, issued a report critical of Freddie Mac.

In the case of IndyMac Bank, the chairman of the Joint Economic Committee in Congress, Charles Schumer, wrote letters June 26 to several federal banking agencies saying the bank might have “serious problems” with its loan holdings. Federal regulators accused the senator of helping fuel a massive run on the bank’s deposits. A total of $1.3 billion was withdrawn in two weeks.  
 
Mortgage and credit crisis
Since June Fannie Mae and Freddie Mac have lost $11 billion due to home loan foreclosures. One in every 501 households was in a stage of foreclosure in June according to RealtyTrac Inc., a company that sells data on defaults. Bank seizures of homes have risen 171 percent since January 2005, the company said. A JP Morgan analyst estimates Fannie Mae and Freddie Mac losses through next year will total $48 billion.

In March IndyMac Bank reported that nearly 9 percent of its loans were delinquent, up from 1.5 percent the previous year. At the end of 2007 the bank’s shares sold for $6. The day before it was taken over by the government its shares plunged to 28 cents.

Freddie Mac took steps July 18 to register with the Securities Exchange Commission (SEC) in order to issue new stocks. The company said it plans to raise $5.5 billion to strengthen its balance sheet.

The filing with the SEC does not guarantee that Freddie Mac will issue new stocks or be able to raise the necessary cash. In the filing, the company said, “Our ability to issue additional preferred or common stock will depend, in part, on market conditions, and we may not be able to raise additional capital when needed,” reported the Washington Post.

Freddie Mac also noted that issuing new stock could dilute the value of existing stockholder’s shares and may carry other terms and conditions that could adversely affect them.  
 
World market threat
U.S. government officials are concerned that Freddie Mac and Fannie Mae’s troubles could have serious consequences for the world capitalist economy. About one-fifth of securities issued by the two mortgage companies and a handful of smaller quasi-governmental agencies were held by overseas investors as of March. They held one out of ten U.S. mortgages.

Financial institutions in Asia hold some $800 billion in Fannie Mae and Freddie Mac debts. The bulk are held in China and Japan. As of June 2007, the most recent Treasury figures available, investors in China held $376 billion and in Japan $228 billion.

In Europe, investors in Luxembourg hold roughly $39 billion in the mortgage companies’ debt; in Belgium, $33 billion; in the United Kingdom, $28 billion; and in Russia, $75 billion.  
 
 
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