Fears are growing that two of the most important mortgage companies in the US may run short of funds, placing the US economy at even greater risk.
The companies, Fannie Mae and Freddie Mac, own or guarantee $5 trillion of debt, close to half of all US mortgages.
Their shares continued to plummet this afternoon after comments from the US government offered no hint of a bail-out. Treasury Secretary Henry Paulson, responding to reports a government takeover was under consideration, said 'our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission'.
Shares in both companies were more than 40% lower on Wall Street this afternoon. Both have lost close to 90% of their value since August.
The companies have been hit hard by the US housing crisis, seeing borrowing costs rise and suffering billions of dollars of losses as many investors lose confidence they can raise sufficient capital to stay afloat.
Were Fannie and Freddie unable to borrow, or find it too costly to borrow, they would not be able to buy mortgages from lenders. This would make it far more difficult and perhaps impossible for people to obtain home loans, which could cause the housing market to grind to a halt.
A White House spokesman said President Bush's economic advisers kept a 'close watch' on markets. But he said the best thing for Fannie and Freddie would be for Congress to pass new oversight legislation.
Investors view Fannie and Freddie as the last bastions of support for a US housing market in its worst downturn since the Great Depression. Putting Fannie and Freddie under government control, or conservatorship, could wipe out shareholders, and oblige taxpayers to cover losses on home loans Fannie and Freddie own or guarantee.
Since the housing crisis began, Fannie and Freddie have lost more than $11 billion, and raised some $20 billion of capital. The fate of the two companies has ramifications far beyond the US, as US agency debt and agency-issued mortgage bonds held by foreign central banks has grown 18% this year to a record $979 billion.
Meanwhile, the European Central Bank accepts Fannie and Freddie loans as collateral from commercial banks.
