Fannie Mae, Freddie Mac Bring Stock Market Down
In order to allow more people to get home mortgage loans, the government chartered two mortgage lenders and gave them the ability to buy home mortgage loans from other lenders. These companies are Fannie Mae and Freddie Mac. They used to be heavily regulated. But in the days when de-regulation was in vogue, Fannie Mae and Freddie Mac found themselves sidled with fewer and fewer restrictions.
Indeed, the two government chartered companies had enough freedom to become the largest buyers of home mortgage loans — and expose themselves to what became the subprime mortgage crash. And now, despite the rosy outlook of several people over the last few months that the worst was over, serious talks are underway about what might happen if Fannie Mae and Freddie Mac actually fail. Fortune’s Daily Briefing reports on the Fannie Mae and Freddie Mac issue:
Even though the discussions have been ongoing for months and are described as part of the Treasury Department’s normal contingency planning, the newspaper says talks have become more serious as the stocks of both companies continue to fall. On Wednesday, shares hit their lowest closing prices in more than 15 years after plummeting Monday. Freddie and Fannie shares were down more than 19% and 10%, respectively, in afternoon trading Thursday.
Those contingency plans may have to be put into practice sooner rather than later. William Poole, the former president of the St. Louis Federal Reserve, says that the two government chartered mortgage lenders are already insolvent. He also doesn’t think that taxpayers should be on the hook for a bailout. (But we’ve already bailed out Bear Stearns. We’re bailing out homeowners. What’s one more bailout?)
At any rate, the Bush Administration is wondering whether or not the bailout point is really the issue. After all, Fannie Mae and Freddie Mac are the largest buyers of home mortgage loans in the country. This means that if these two companies fold, serious problems could ensue.
Fannie Mae and Freddie Mac aren’t just in trouble themselves. They are plunging so dramatically that the rest of the financial sector is coming with them. And bringing the stock market along for the ride.
Tags: stock market, Fannie Mae, home mortgage loans, Freddie Mac,
subprime mortgage, mortgage lenders, Bush Administration
It’s a pretty good day on the stock market for mortgage lenders — and for companies that have invested in them. JP Morgan (JPM) and Merrill Lynch (MER) are both up this morning on news from different quarters.