Freddie, Fannie May Need Federal Bailout

Washington, DC, July 11, 2008--The New York Times reported Friday the government was considering taking over the operations of one or both Fannie Mae and Freddie Mac, adding to fears that have mounted this week.

Fannie and Freddie play a crucial role in providing funding for home loans by buying up mortgages and packaging them as investments. If they are unable to operate, the implications could be dire.

On Thursday, the Office of Federal Housing Enterprise Oversight -- the companies' chief regulator -- said both Fannie and Freddie remain "adequately capitalized," after Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke sought to calm investors jitters in testimony on Capitol Hill.

Yet reassurances by government officials appear not to be working.

Congress created Fannie in 1938 and Freddie in 1970 to keep money flowing into the home-loan market by buying up mortgages and bundling them into securities for sale to investors worldwide -- thereby making home ownership affordable for low- and middle-income Americans.

Today the companies hold or guarantee around $5.3 trillion in home-loan debt, though under a 1992 law they are required to hold only a fraction of what is mandated for commercial banks as a financial cushion against risk.

Friedman, Billings, Ramsey & Co. analyst Andrew Parmentier said the question of capital-raising plans at either company remains a "moving target."

"In an instance where equity capital is not raised and investors see a meaningful change in debt spreads, it is clear to us that government action would be undertaken to ensure that the institutions would not fail," Parmentier said in a note to clients.