WASHINGTON – Shares in Fannie Mae and Freddie Mac plunged to new lows yesterday as policymakers undertook new measures aimed at stemming the potential collapse of the two secondary mortgage market giants.
In an extraordinary move, the Securities and Exchange Commission tried to halt the short-selling of Fannie and Freddie shares – bets that the stock will fall further – by banning the practice of selling short stock in major American financial firms without borrowing the requisite shares. The practice, known as naked short-selling, already is illegal, but enforcement is rare.
Naked short-selling helped push down the stock and precipitate the failure of Bear Stearns, as well as the recent problems at Lehman Brothers.
The SEC’s move came as shares in Fannie Mae were falling almost 30% to a new low of just $7.07; and shares in Freddie Mac were dropping 26% to only $5.25.
The continued sell off came even as Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson were explaining their proposals to ease the crisis to the Senate Banking Committee. The proposals amount to making the implicit guarantee of Fannie Mae and Freddie Mac debt explicit by giving the two companies access to the Fed’s discount window for low-interest, government-backed loans and increasing their guaranteed lines of credit with the Treasury 10-fold to $300 billion, while empowering the Treasury to buy equity in the two companies in times of crisis.
Treasury Secretary Paulson said the Bush administration has no immediate plans to extend emergency loans to Fannie Mae and Freddie Mac or to purchase the stock of the two companies, though it is seeking the power to do so if necessary.
The proposals have come under criticism by some. Sen. Jim Bunning, R-Ky., said the Bush administration "is asking for a blank check to buy as much Fannie and Freddie debt as he wants – for this unprecedented intervention in our free markets.”
Members of the House Financial Services Committee who oppose a government bailout of Fannie and Freddie were calling for hearings on the proposals.
The prospects of Fannie Mae and Freddie Mac are closely tied to credit unions, which sell more than half of their mortgage loans to one of the two and also hold tens of billions of dollars in bonds issued by the two companies.
Congressional leaders yesterday were debating whether to attach the Fannie and Freddie measures to a pending housing rescue package, or to debate them thoroughly before passing them. “They’re still trying to figure out the best way to proceed; whether to make them part of the broader housing package or consider them separately,” Brad Thaler, senior lobbyist for NAFCU, told The Credit Union Journal yesterday.
Meantime, a broader debate was breaking out over a more comprehensive rescue. Some observers were suggesting that the government merge Fannie and Freddie, creating one giant secondary mortgage market provider.
Others were suggesting breaking up the two companies and assigning their assets to one of the 12 Federal Home Loan Banks.
