 Fears over increasing loan defaults and a loss of consumer confidence caused shares and bonds in two mortgage giants, Fannie Mae and Freddie Mac, to plunge yesterday. The two government-backed mortgage lenders suffered their biggest losses in more than 15 years, as investors scrambled to dump shares and bonds as a result of exponential increases in mortgage defaults over the last several months. At one point yesterday, the Wall Street Journal reports Freddie Mac losing nearly 30% of its value. And, while the decline in Fannie and Freddie's stocks were sharp, the biggest impact will be felt within the mortgage market. If the companies fail to meet their capital, it will be extremely difficult for Fannie Mae or Freddie Mac to buy and guarantee mortgages. As a result, borrowing cost to homebuyers would likely increase which would more than likely further drive down home prices. Because Fannie Mae and Freddie Mac are the two largest lenders and backers of mortgages, the health of the housing market is crucially linked to these two companies. Fannie Mae and Freddie Mac are chartered by Congress to keep the U.S.'s mortgage market stable, liquid, and affordable in all economic conditions. Freddie Mac has financed more than 50 million homes, or 1 in 6 homebuyers and more than 4 million renters. The company financed more than 3 million homes in 2007 alone. Fannie Mae is the leading market-maker in the secondary mortgage market, which helps replenish the supply of lendable money for mortgages by ensuring that money continues to be available for new home purchases. Together, these companies own or guarantee more than $5 trillion of home mortgages, which is almost half of all home loans. With the companies suffering from more than $11 billion in loses since the 4th quarter of 2007, investors and politicians are growing extremely nervous about the companies' and the mortgage market's future, especially as loan defaults are expected to continually increase over the next few months. Fannie Mae shares were down by nearly 17% yesterday (-$3.04) to $15.75 a share. Meanwhile, Freddie Mac's shares were down nearly 18% (-$2.60) to $11.90 a share. This marks the lowest close for both companies since the early 90's. Over the past year, Freddie Mac has lost 80% of its value. Similarly, Fannie Mae has lost more than 75% of its value. While the situation looks bleak, both Congress and the White House will certainly keep pumping money into mortgages, as the health of these companies are synonomous with the health of the housing market. |
