Bailout speculations surround mortgage giants

As mortgage giants Freddie Mac and Fannie Mae sink deeper into financial troubles, rumours have been raised about the possibility of extensive financial aid from the American government.


Speculation about the stressed financial health of US mortgage-finance giants Fannie Mae and Freddie Mac swirled Wednesday as their share prices further plummeted.

The two mortgage giants, which prop up a large part of the US mortgage market, have been at the center of a financial storm in recent weeks, especially after both companies revealed hefty second-quarter losses.

A Wall Street Journal report Wednesday said Freddie Mac has been forced to offer "unusually rich terms" to investors in relation to a three-billion-dollar securities auction.

The Treasury, which was recently empowered by Congress and US President George W. Bush to extend credit and pump liquidity into Fannie Mae and Freddie Mac if necessary, is keeping a close watch on the companies' fortunes.

"As you would expect, we have been in communication with the companies for months to receive updates. We’ve also been communicating with their regulator and the Federal Reserve," Treasury spokeswoman Jennifer Zuccarelli told AFP.

But investors continue to sell the companies' stocks.

Fannie Mae's shares were down a heavy 17.1 percent at 4.98 dollars in late morning trading, while Freddie Mac was 20.1 percent lower at 3.30 dollars.

Both companies' shares have fallen heavily in the past year since a credit crunch erupted last August, triggering losses at the two firms.

The Treasury on Monday had played down a report by Barron's weekly suggesting the government could be poised to extend significant financial aid to the struggling mortgage-finance giants.

Zuccarelli said Monday that the Treasury had no intention of using its special authority to extend emergency financial aid to the ailing companies.

Fannie Mae chief executive Daniel Mudd told the CNBC business channel Wednesday morning that the company had not asked the government for financial assistance. He also said such assistance had not been offered by the government.

The two firms, which are chartered by Congress to boost home ownership but are shareholder-owned, have endured hefty losses amid a lingering US housing market slump and as losses on mortgage securities continue rattling credit markets.

Concern about the two firms has unsettled investors because together they own or guarantee some 5.2 trillion dollars in loans, or about 40 percent of the total value of home loans in the United States.

Bush sought to restore confidence in the two mortgage finance giants as well as the wider housing market by recently approving a sweeping housing rescue plan -- the Housing and Economic Recovery Act of 2008 -- designed to help 400,000 homeowners avert foreclosure.

The bill, which Bush signed into law late last month, empowers the Treasury to extend credit to Fannie Mae and Freddie Mac if Treasury Secretary Henry Paulson deems such a move necessary.

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