Shares of Fannie Mae and Freddie Mac, already down on worries about rising rates, lost more ground last week after the Treasury Department announced it would reduce its issuance and buy back debt.

The possibility that the move would result in wider spreads between the yields on Treasuries and the yields on the agencies' debt was seen as another negative for the two companies. On Wednesday, the day of the announcement, Fannie's stock fell $2.50, to $65.25, and Freddie's fell $3, to $53.625.

The yield spread between Fannie and Freddie's noncallable debt and Treasuries peaked at 88 basis points last week, from a low of 79 the previous week and an average of 64 earlier in the year. The differential was enough to prompt investors to sell Fannie and Freddie stock, said Salomon Smith Barney analyst Thomas O'Donnell.

Investors are concerned that the rise in mortgage rates will "depress mortgage originations" as well as "the ability of Fannie and Freddie to grow their mortgage portfolios," Mr. O'Donnell said. A wider spread on the agencies' debt means it is more expensive for them to fund mortgage purchases. On the other hand, by reducing its role in the capital markets, the Treasury opened the door for Fannie and Freddie to play a more prominent role.

Mortgage stocks have been falling since the beginning of July on the assumption that loan demand falls as interest rates rise. Countrywide Credit Industries, at $43 on July 1, was at $34TK on Friday; Fannie Mae, at $68.938 on July 1, slipped to $64TK, while Freddie Mac fell from $57.438 to tk.

On Thursday, Freddie reported that 30-year fixed-rate mortgages averaged 7.89% for the week ending Aug. 4, up from 7.70% the prior week before.

Though rates are approaching 8%, mortgage executives say investor fears may be overblown. Rates are still low by historical standards, said Mel Steele, senior vice president for secondary marketing at PNC Mortgage in Vernon Hills, Ill. "Purchase-money mortgages are still very affordable," he said, adding that PNC is seeing "a good flow of purchase activity."

Borrowers are either grabbing the 8% rate or taking out hybrid adjustable-rate mortgages as a way to get a rate in the low-to-middle 7% range. Hybrid adjustable-rate mortgages give borrowers a loan at a fixed rate for a set period before converting to a floating rate.

Though the Mortgage Bankers Association has reported that refinancing accounts for only 20% of all applications, "the refinances certainly have not gone away," Mr. Steele said.

Whitney Fite, a senior mortgage banker for HomeBanc Mortgage Corp. in Atlanta, said borrowers who had been looking to lock in low rates are now opting for adjustable-rate loans.

There is a "psychological threshold of 8%" for the mortgage market, he said. "We've definitely moved back to an intermediate ARM market where some people are looking for an alternative to the 8%," he said.

Five- and seven-year adjustable-rate hybrid mortgages again have become "the product of choice," Mr. Fite said. Four months ago, about 10% of his customers were choosing adjustable-rate mortgages, he said, but that has risen to nearly 60%.

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