Vol. 72/No. 35      September 8, 2008

Fannie Mae’s market value has declined by 95 percent over the past year, shrinking to $5.2 billion from almost $40 billion. Freddie Mac’s stock is down 91 percent this year with shareholders’ value shrinking from $22 billion to $2 billion. Moody’s Investors Service on August 22 cut the two mortgage companies preferred stock five levels to the lowest investment grade.

The rising number of home foreclosures and defaults have led to huge losses by both companies, which reached $14.9 billion over the past year. Freddie Mac reported that its losses from foreclosures and other failed home loans nearly doubled in the second quarter of 2008 from the previous three months to $2.8 billion. Fannie Mae’s losses rose to $5.3 billion in the second quarter from $3.2 billion in the first quarter.

“The Treasury Department will have to step in soon to rescue to both agencies with an equity infusion because their stocks have shriveled to a combined market capitalization of around $7 billion,” stated an August 25 Barron’s article. “Ruinous dilution precludes their raising even $20 billion, let alone filling the $100 billion in negative equity that we estimate exists in the combined balance sheet.” The article added, “The real test for Fannie and Freddie will come over the next five weeks when, according to Barclays Capital, the pair will have to raise and roll over $225 billion of mostly short-term debt.”

A housing bill signed into law by President George Bush July 30 allows the Treasury Department to extend an unlimited line of credit to Fannie Mae and Freddie Mac and to buy their stock.

William Poole, former head of the St. Louis Federal Reserve, told the media that Freddie Mac is technically insolvent and Fannie Mae’s value may be negative next quarter. Former Federal Reserve Chairman Alan Greenspan has called for both companies to be nationalized, which would wipe out all current shareholders entirely.

Despite government moves to lower interest rates, tighter credit demands by these agencies and the banks have kept mortgage rates high. At the end of August a 30-year fixed-rate mortgage averaged 6.37 percent, the highest level in six years.

“Fewer people are willing to buy property, which contributes to a decline in housing prices and that leads to more foreclosures and higher losses, which hurts Fannie Mae and Freddie Mac, which pull back by tightening their mortgage terms, thus continuing the cycle,” Robert Litan from the Brookings Institution told the Washington Post.

Government intervention to “save” these two mortgage companies poses a threat to a number of regional U.S. banks, noted an article in the August 23 Financial Times. They hold a large amount of preferred shares in Fannie Mae and Freddie Mac, which would be wiped out. The collapse of these companies will also have serious consequences on the world capitalist economy. About one-fifth of securities issued by the two mortgage companies are held by overseas investors. This includes $376 billion by investors in China and $228 billion in Japan.  
 
 
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