Speculation that the U.S. government would have to step in to bail out struggling mortgage-giants Freddie Mac (FRE) and Fannie Mae (FNM) escalated as the markets set to close for the weekend.
Shares recovered slightly after Reuters reported U.S. Federal Reserve Chairman Ben S. Bernanke granted Freddie Mac and Fannie Mae emergency access to the Fed’s discount window.
Freddie Mac shares pared earlier losses to shed just $0.25 Friday, a 3% decline, to close at $7.75. Earlier in the day, the stock had traded as low as $4.01. Freddie Mac is down over 77% year-to-date as of Friday’s close. The stock has traded between $3.89 and $67.20 over the past 52 weeks.
Fannie Mae stock had a similar fate, shedding $2.95, a 22% to decline to close at $10.25, after climbing from $7.25 in early hours trading. Fannie Mae shares are down 45% in the past week and 74% year-to-date. Shares have traded between $6.68 and $70.57 over the last 12 months.
Rumors of a government-sponsored bailout swirled, with
The New York Times reporting that President Bush & Co. were mulling over options. But Citigroup Corp. (
C) issued a bold research note supporting the two government-sponsored entities (GSEs) in their current incarnations.
"We believe that no one in Washington desires for a nationalization of the GSEs, which would bring the burden of providing mortgage access and liquidity on to the shoulders of taxpayers," Citigroup Global Markets analysts Bradley Ball and Arren Cyganovich wrote in a research note Friday concerning Freddie Mac and Fannie Mae.
"We believe the market needs to be reminded that the GSEs were structured as shareholder-owned institutions for a reason - to provide non-federal capital support for the U.S. housing and mortgage markets, and that the GSE structure has worked in the past (such as during 1998) and continues to work today," the analysts continued, MarketWatch reported.
And while it’s true that the government might be hesitant to step in after what many considered a taxpayer-sponsored bailout of The Bear Stearns Cos. Inc. (BSC), it’s also true that the government can’t afford to let Freddie Mac and Fannie Mae fail. Together, the two lenders guarantee about half of the $12 trillion U.S. home mortgage market.
"The impact of a failure of Fannie and Freddie, though technically insolvent, is beyond imagining, far greater than the bankruptcy of a Bear Stearns," said Barron’s Randall W. Forsyth on Friday. "For that reason alone, such an eventuality is unthinkable."
Foreclosures Hit Fannie Mae and Freddie Mac in the Bottom Line
Rocketing foreclosure rates are only serving to exacerbate the problems of the largest U.S.
