Speculation is mounting in the US that the Treasury will shortly have to give direct support to Fannie Mae and Freddie Mac, as the government-sponsored enterprises’ (GSEs) equity prices plunged to 17-year lows today.
As of the morning of August 21, Fannie Mae was trading as low as $3.54 a share while Freddie Mac stock was selling for just $2.55 in heavy New York trading.Over the past 30 days, Fannie Mae’s stock has traded at an average of $11.50 a share, a level not seen since February 1991. Similarly, Freddie Mac’s average price of $8.17 for the past month has not been witnessed since November 1991. The GSEs' stock has been falling consistently since the third quarter of last year. Since then, Fannie Mae has taken losses of $9.44 billion relating to its mortgage guarantor and purchasing activities, most recently reporting a $2.3 billion loss for the second quarter of 2008. Losses over the past trading year have been more modest at Freddie Mac, although it has still shed $5.47 billion and taken a hit of $821 billion for the second quarter. While the large losses have no doubt soured investor appetite towards the GSEs – which have effectively been the only source of new mortgage underwriting and securitisation in the US housing market over the past year – recent efforts by the authorities to restore investor confidence in the firms might have had the opposite effect and perhaps even worsened the situation. On July 13, treasury secretary Hank Paulson announced new legislation allowing the US government to buy GSE debt and equity if necessary to keep the firms adequately capitalised and able to continue their “public mission” of maintaining stability and liquidity in the US housing market. The second element in the proposals was to open the door for the GSEs to access an unlimited line of direct credit from the Treasury should their capital bases become significantly impaired and private sector confidence evaporates to the extent that debt and equity sales fail to attract bidders. Initially, the move seemed to restore some measure of public confidence, with share prices of both firms almost doubling between July 15 and July 23. Since then, however, share prices have ebbed away to today’s 17-year lows as speculation among analysts and market commentators has mounted that the government will exercise its new powers and step in to formally bail out Fannie and Freddie - perversely undermining market confidence rather than strengthening it.Perhaps the biggest factor in determining the fate of the GSEs will be their ability to roll over several hundred billion dollars of debt in the course of the next few months. Current debt holders are likely to exercise their option to dump the debt at the first opportunity, given the eroding equity price, and finding another institution willing to take on the risk might be a tall order. Analysts note the perception of the GSEs' finances as precarious, while accurate at this point, does not reflect the longer-term prospects for the firms and the fact they will probably thrive if they can retain market confidence through the next few crucial months. “The earnings power of the GSEs is substantial, but it is being overwhelmed in the short term by this loss experience. That will inflect at some point, as the losses plateau and the earnings power becomes more evident. It’s possible that Fannie and Freddie will earn their way out of this problem, but the loss experience over the next 12 to 18 months will be critical in making that determination,” said Eric Wasserstrom, a mortgage finance analyst at UBS in New York. Unless they can find a buyer for their rollover debt, Fannie Mae and Freddie Mac might have no choice but to turn to the government to take it on, a move that is regarded by many commentators as a death knell for the firms. Once that point is crossed, the door is effectively closed on the possibility that private money would ever be invested in the GSEs again, analysts say.
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