Shares in US mortgage finance giants Freddie Mac and Fannie Mae have plunged again on fears that the government will be forced to bail out the pair.

The slide reignited concerns about the health of the financial sector and sent the US stock market sharply lower.

A report by US financial weekly Barron’s suggested that the chances of a government rescue were increasing.

However, the Treasury said that it had no plans bail out the two firms, which underpin the US mortgage market.

The Treasury gained the authority to bail out the Freddie Mac and Fannie Mae, including buying shares in the two companies if needed, in a rescue plan approved at the end of July.

“The degree and depth of what’s happening in the financial industry is beyond anything we’ve seen in decades” John Merrill, Tanglewood Wealth Management

Citing an unidentified source, Barron’s said US officials anticipated that the two firms would not be able to raise the money they needed to improve their financial footing.

The paper said a government bail-out would likely wipe out existing holders of the firms’ shares. Both firms were trading near 18-year lows.

Stocks rattled

Shares of Fannie Mae fell more than 22%, or $1.76, to close at $6.15. Shares of Freddie Mac fell almost 25%, or $1.46, to $4.39.

The Dow Jones Industrial Average fell 180.51, or 1.55%, to 11,479.39 points also rattled by a Wall Street Journal report that suggested that Lehman Brothers’ quarterly earnings might be weaker than expected.

John Merrill, chief investment officer at Tanglewood Wealth Management, said investors were realising that the crisis in the financial sector was unlikely to abate any time soon.

“The degree and depth of what’s happening in the financial industry is beyond anything we’ve seen in decades and it takes time to get your arms around the severity of what’s happening and what the long-term and short-term ramifications are,” he said.

Severe stress

Shares in Freddie and Fannie fell sharply last month on fears that they would run out of money to fund their business, forcing the US government to take radical steps to ease the panic.

The two firms are the backbone of the US mortgage market as almost all US lenders rely on them to buy their mortgages in order to access the funds to lend to consumers.

As mortgage guarantors, they must pay out when homeowners default on their loans.

With the housing market across the US crumbling, their finances have come under severe stress.

News reported by The BBC

Problems in the US housing market have pushed mortgage finance company Fannie Mae into the red.

The group sank to a net loss of $2.3bn in the three months to 30 June, against a profit of $1.97bn last year.

It comes days after its sister company Freddie Mac posted worse-than-expected results and its top executive warned house price falls are not over yet.

Both government sponsored firms own, or guarantee, nearly half of the nation’s mortgage debt.

Shares in Fannie Mae sank in the wake of the announcement, falling 9.8% to $8.98.

Difficult market

As mortgage guarantors, Fannie Mae and Freddie Mac, must pay out when people default on their loans.

But as a result of recent woes in the US housing market and subsequent sub-prime crisis the pair have run into severe difficulty.

“Fannie Mae says it has the capital to weather the storm, but its looking more and more stormy by the day” John Raines Exclusive Analysis

Fannie Mae said that the current housing crisis had added to its woes to the tune of $5.3bn in credit expenses.

The latest losses at the firm – which came in at more than three times analysts’ estimates – followed a $2.2bn loss for the first three months of the year.

“Our second-quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Daniel H Mudd, president and chief executive officer of Fannie Mae.

Cost cutting

He added that the firm had also taken steps to raise an additional $7bn to help it tackle the “most difficult US housing market in more than 70 years”.

As part of the plan Fannie Mae is slashing its dividend by more than 85% to 0.05 cents, raising its fees and has taken steps to cut its costs by 10%.

The group also said it would stop purchasing ‘Alt-A’ loans – loans made to borrowers with good credit but little proof of their income, or people who either put down a small deposit, or no deposit, for their loan.

But there was little to offer hope in near-term future with Fannie Mae warning that increased volatility in capital markets and deteriorating credit conditions meant that it would face more losses.

Bail-out

Last month, the federal government offered a financial lifeline to the two beleaguered companies offering to extend their line of credit.

However, the financial aid may leave the taxpayer facing a bill of $25bn over the next two years.

“The taxpayer is stuck if they have to be bailed out,” John Raines, deputy director of political risk for Exclusive Analysis told the BBC.

He added that reports had suggested the actual cost could end up being anywhere in the region of between $10bn to $100bn.

“Right now, Fannie Mae says it has the capital to weather the storm, but its looking more and more stormy by the day.”

News reported by The BBC

US President George W. Bush has signed into law a bill designed to help struggling US homeowners and prop up the battered US housing market.

The new law creates a $300bn (£150bn) rescue fund to help thousands of homeowners get cheaper loans.

It may also be used to bail out the struggling mortgage giants Freddie Mac and Fannie Mae, which own or guarantee around half the nation’s mortgage debt.

The White House said the bill would boost confidence in the housing market.

It said the bill was designed to help hundreds of thousands of Americans trapped by mortgages they can no longer afford.

They will be offered the chance to refinance their debts with state-backed, fixed-rate loans.

White House spokesman Tony Fratto said that the Federal Housing Administration would begin right away to implement the legislation that is “intended to keep more deserving American families in their homes”.

However, the bill’s critics have said it will cost US taxpayers billions of dollars, and query the wisdom of bailing out irresponsible homeowners or unscrupulous lenders.

Reposessions soar

According to US research firm RealtyTrac, the number of US homes in some stage of foreclosure more than doubled between April and June from the previous year.

FREDDIE MAC & FANNIE MAE
The two firms:
Buy mortgages from approved lenders and then sell them on to investors – rather than lending directly to borrowers
Guarantee or own about half of the $12 trillion US mortgage market
Are relied on by almost all US mortgage lenders
Are looked to for funds to meet consumer demand for home mortgages
Link mortgage lenders with investors – keeping the supply of money widely available and at a lower cost
Have no direct UK equivalent

Q&A: Freddie Mac/Fannie Mae
Importance of Freddie and Fannie

The figures showed that one in every 171 US households was in the process of losing their home – up 121% on last year.

The problems in the housing market stem from sub-prime lending to those with poor credit histories.

Many of these borrowers have been unable to keep up with their mortgage repayments, and now face losing their homes.

This in turn has hurt the many financial institutions worldwide that invested in instruments linked to sub-prime mortgages.

Freddie Mac and Fannie Mae do not lend directly to homebuyers, instead buying mortgage debt from approved lenders such as banks, and then selling it on to investors.

Their shares have plunged in recent months on fears that they will not be able to cover their losses.

The new law expands a temporary line of US Treasury credit to the two firms and gives the government the option to buy their shares in them if they ran into trouble.

News reported by The BBC

The US Senate has approved a rescue bill designed to prop up America’s battered housing market.

The new law creates a $300bn (£150bn) rescue fund to help thousands of homeowners get cheaper loans.

It may also be used to bail out the struggling mortgage giants Freddie Mac and Fannie Mae, which own or guarantee around half the nation’s mortgage debt.

The bill has been approved in a very short time. President George W Bush is expected to sign it into law next week.

The BBC’s Jack Izzard in Washington says the bill will help hundreds of thousands of Americans trapped by mortgages they can no longer afford.

They will be offered the chance to refinance with state-backed, fixed rate loans.

Boom and bust

The housing crisis is causing serious problems for the wider US economy.

Almost 740,000 US homes entered the foreclosure process in the second quarter of 2008, according to research firm RealtyTrac.

The worst-hit areas were Nevada, California, Florida and Arizona, which had seen the biggest house price rises during the boom years, and the largest volume of sub-prime lending.

The bill’s Republican critics say it will cost US taxpayers billions, and query the wisdom of bailing out irresponsible homeowners or unscrupulous lenders.

President Bush had initially threatened to veto the bill over a provision for $3.9bn (£1.95bn) in community grants to buy up and repair repossessed homes.

News reported by The BBC

The US Treasury’s rescue plan for Fannie Mae and Freddie Mac could cost taxpayers $25bn, congressional researchers said on Tuesday as evidence mounted that turmoil at the two companies is helping push up interest rates for homebuyers.

US mortgage rates have hit their highest levels in about a year amid rising Treasury yields and growing fears among investors that Fannie and Freddie will cut back their purchases of home loans and mortgage securities.

Freddie Mac secures SEC registration – Jul-18Hank Paulson, Treasury secretary, on Tuesday said he was “confident” Congress would complete work on approving his plan to give the Treasury authority to increase its credit line to Fannie and Freddie and invest in their equity, if necessary.

The plan has faced criticism on Capitol Hill for exposing taxpayers to potentially huge losses, but is seen by most lawmakers and administration officials as necessary to prevent mortgage rates from climbing even higher.

“I would rather not be in the position of asking for extraordinary authorities to support the GSEs, but I am playing the hand that I have been dealt,” Mr Paulson said in New York.

“Turning the corner on the housing correction requires homebuyers to return to the market, and homebuyers need available and affordable mortgage financing.”

The $25bn estimate of the fiscal impact of the Treasury’s proposed rescue plan for the two ailing mortgage giants was prepared by the non-partisan Congressional Budget Office.

It said there was more than a 50 per cent chance the US would not have to intervene to save Fannie Mae and Freddie Mac over the next 18 months. But it said there was a 5 per cent chance the Treasury would have to make up about $100bn in additional losses if housing market conditions worsen. On the basis of these estimates, and other factors, it put the cost at $25bn.

The CBO estimate was generally well received by lawmakers. “A lot of people thought it would be much higher,’’ said Richard Shelby, top Republican on the Senate banking committee.

Meanwhile, Barney Frank, Democratic chairman of the House financial services committee, was pushing for a vote on the legislation as early as Wednesday in the House.

Policymakers’ hopes of reviving the US housing market have been complicated by rising mortgage rates, which prevent homeowners from being able to refinance home loans at lower levels.

Keith Gumbinger, vice-president at HSH Associates, said the rate on 30-year “conforming” mortgages – those that Fannie or Freddie buy – is now at 6.71 per cent, essentially a 52-week high. He also said the historical relationship between mortgage rates and government bond yield was changing, meaning home buyers were paying far more relative to Treasuries than they did before the crisis.

News reported by The FT

US mortgage firms Fannie Mae and Freddie Mac are not at risk of collapse, Federal Reserve chairman Ben Bernanke has insisted.

The two pillars of the mortgage market were in “no danger of failing”, he told a Congressional committee.

Shares in the two firms rebounded slightly on Wednesday, although doubts still surround their long-term future.

Fighting inflation, now rising at its fastest pace in 26 years, had become a top priority, the Fed boss added.

Mortgage crunch

In the second day of his semi-annual testimony to Congress, Mr Bernanke sought to allay fears that Fannie Mae and Freddie Mac, which between them guarantee nearly half of US mortgage debt, might run out of cash.

Policymakers have always insisted the two firms are adequately capitalised, but the US Treasury announced plans on Sunday to supply them with additional credit and buy shares in the firms, if needed.

It’s a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level

Ben Bernanke, Federal Reserve chairman

This was not enough to stabilise the firm’s shares, which fell a further 17% on Tuesday on fears that investors may lose out in the event of a government rescue.

But on Wednesday, their shares rose 11% amid a general rally in the banking sector, after regulators vowed to crack down on the practice of “short-selling” shares.

President Bush has defended the plans to help Fannie Mae and Freddie Mac, but denied they were being bailed out.

He said the importance of the firms to the US economy meant there was a “special need” to help them to ensure confidence and stability in the mortgage market.

However, he has stressed that the two firms should remain shareholder-owned.

Bleak backdrop

Mr Bernanke’s Congressional appearance comes against a bleak economic backdrop, with economic growth slowing and inflation rising.

Consumer prices rose 1.1% on a monthly basis in June, more sharply than expected.

Their climb, driven by soaring fuel prices, makes it far harder for the Fed to consider cutting borrowing again to counter the fear of a recession.

“It’s a top priority of the Federal Reserve to run a policy that is going to bring inflation to a acceptable level consistent with price stability,” Mr Bernanke said.

Recent figures have shown the impact of the housing slump and credit crunch on consumer confidence, with retail sales virtually flat last month.

With consumer spending accounting for nearly two-thirds of overall economic output, analysts believe growth could be minimal in the second half of 2008.

But there was also better news on Wednesday, with data indicating that the manufacturing sector remains resilient.

Industrial production rose by 0.5% last month, the best performance for nearly a year and a reversal of two previous months of decline.

News reported by BBC

The boss of the US Federal Reserve Ben Bernanke has warned that there are still “downside risks” to growth in the world’s largest economy.

He also said that the “upside risks” to inflation had intensified recently.

Separately, President Bush said the economy was “remarkably resilient”, but urged Congress to pass legislation to help homeowners as soon as possible.

He defended plans to help mortgage firms Fannie Mae and Freddie Mac but denied they were being bailed out.

‘Special case’

Plans to offer the mortgage institutions Fannie Mae and Freddie Mac access to fresh credit, if called upon, were necessary to stabilise the mortgage market and boost confidence, President Bush said.

However, he stressed that the two firms should remain shareholder owned.

“I know there is a lot of nervousness” President George W. Bush

Government moves to support Fannie Mae and Freddie Mac – which between them guarantee nearly half of US mortgage debt – came after concerns about their exposure to rising mortgage foreclosures saw their share prices collapse.

The government’s response showed it was prepared to take tough decisions, President Bush said, adding that he hoped the action would “calm nerves” among the public and financial markets about the state of the economy.

Despite the problems faced by mortgage lenders and Wall Street institutions, he said that the country’s banking system was “basically sound”.

“We felt a special need to step up to provide, if needed, temporary assistance,” he said of the support for the two mortgage institutions.

“It is really important for people to have confidence in the mortgage market and for there to be stability in the mortgage market,” he added.

‘Tough times’

While acknowledging the economy was facing “tough times”, President Bush said long-term prospects were still good and shrugged off talk of a possible recession.

“I know there is a lot of nervousness but the economy is growing, productivity is high and trade is up.”

However, his comments failed to allay market jitters with the Dow Jones index of leading shares closing below the 11,000 mark for the first time in two years.

Testifying before Congress, Mr Bernanke said the economy faced “numerous difficulties” but expressed hope that the slump in house building could begin to “level out” by the end of the year.

President Bush and Fed boss Mr Bernanke’s comments come as problems in the US housing market weigh on the wider economy, slowing consumer spending and boosting recession fears.

Figures published on Tuesday showed a sharp rise in wholesale price inflation, due to the rising cost of oil, as well as growing pressure on household budgets.

Retail spending rose a weaker-than-expected 0.1% last month, showing that higher living costs and declining confidence have made consumers much more cautious.

With consumer spending accounting for nearly two-thirds of overall economic output, this suggests growth in the US economy could be minimal in the second half of 2008, analysts said.

Balancing act

Earlier this month, the Fed left its main interest rate unchanged at 2%, as it tries to strike a balance between helping avoid a recession and containing rising prices.

The US is not alone in dealing with these twin economic problems, and the UK is wrestling with slower growth and quickening inflation.

Analysts have said that accelerating consumer price growth may mean they are unable to cut interest rates to stoke up growth.

“The Fed’s having a difficult time, as are most other central banks, as to what the next move should be,” said Dustin Reid of ABN Amro.

News reported by BBC