Government-sponsored mortgage finance companies Fannie Mae (FNM) and Freddie Mac (FRE) plunged as much as 15% and 22% respectively yesterday after a Lehman Brothers analyst suggested that an accounting change would force both firms to raise billions of additional capital. The stocks recovered slightly today after OFHEO director James Lockhart said that the two lenders would not be subject to the rule, but as Kevin Depew (Executive Editor of Minyanville.com), in an interview with Aaron Task at Tech-Ticker explains, nationalization is still inevitable. Task:
Rather than the accounting rules, what’s really got investors spooked is a growing realisation the government will have to nationalize Fannie and Freddie, says Kevin Depew, executive editor of Minyanville.com.
The two mortgage lenders are simply too big to fail and too critical to the housing market, Depew says. Given Fannie and Freddie own or guarantee 50% of all housing debt, according to the WSJ, continued stress on their balance sheets means higher borrowing costs for the firms, and ultimately higher mortgage rates for individuals. It also means another round of write-downs for the battered financial sector generally, which owns a lot of Fannie and Freddie-backed paper.