Source:
NY TimesWASHINGTON — Shares of Fannie Mae and Freddie Mac, the beleaguered mortgage finance companies, plummeted again on Friday morning, as senior Bush administration officials consider a plan to have the government take over one or both of the companies and place them in a conservatorship if their problems worsen, according to people briefed about the plan.
Fannie Mae stock was down 36 percent in early trading compared with Thursday’s closing price; Freddie Mac stock was down 41 percent
Fannie Mae and Freddie Mac have been hit hard by the mortgage foreclosure crisis. Their shares are plummeting and their borrowing costs are rising as investors worry that the companies will suffer losses far larger than the $11 billion they have already lost in recent months. Now, as housing prices decline further and foreclosures grow, the markets are worried that Fannie and Freddie themselves may default on their debt.
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The companies are by far the biggest providers of financing for domestic home loans. If they are unable to borrow, they will not be able to buy mortgages from commercial lenders.
In turn, that would make it more expensive and difficult, if not impossible, for home buyers to obtain credit, freezing the United States housing market. Even healthy banks are reluctant to tie up scarce capital by offering mortgages to low-risk home buyers without Fannie and Freddie taking the loans off their books. (my emphasis)
Read more:
http://www.nytimes.com/2008/07/12/business/12fannie.html?_r=1&hp&oref=slogin
In a related story from Reuters via Yahoo Finance:
Reuters
Stocks extend slide after Paulson comments
Friday July 11, 10:35 am ET
NEW YORK (Reuters) - Stocks extended losses on Friday after Treasury Secretary Henry Paulson offered no hint of an imminent government bailout of mortgage giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News).
http://biz.yahoo.com/rb/080711/markets_stocks.html-------------------------
This could be catastrophic. This may be the other shoe dropping now. And the government can't bail anybody out because it just doesn't have the money. Another article says the bailout would be to the tune of $5 trillion which would double the public debt.
...and oh, yeah! It's a
mental recession.