By David S. Hilzenrath and Tomoeh Murakami Tse
Washington Post Staff Writers
Tuesday, August 7, 2007
The U.S. stock market yesterday experienced its biggest one-day percentage gain in more than four years, extending a series of steep ups and downs in recent weeks.
The gainers included government-chartered mortgage funding companies Fannie Mae and Freddie Mac, whose shares rose on speculation that regulators may relax restrictions on their investments to allow them to pick up slack in the troubled market for home loans.
The Standard & Poor's 500-stock index, a broad market measure, jumped 34.61 points, to 1467.67. The 2.4 percent gain was the largest single-day gain for the index since April 2003.
The Dow Jones industrial average of 30 blue-chip stocks rose 286.87 points, or 2.2 percent, to 13468.78. The tech-heavy Nasdaq composite index added 36.08, or 1.4 percent, to 2547.33.
Leading stocks higher were financial companies -- investment banks, regional banks, insurance companies, asset managers and brokerage firms -- that had been particularly beaten down in the recent market turmoil caused by lingering weakness in housing and related lending markets. But yesterday, the financial sector advanced nearly 5 percent, double the gains of the overall market. Fannie Mae's stock rose 10 percent to close at $62.50. Freddie Mac's rose almost 8 percent to $60.
The firms, among the largest companies in the Washington area, channel funds to lenders in two main ways: packaging mortgages into securities for sale to investors, and investing directly in mortgages and mortgage-backed securities.
The volume of mortgage-related investments the firms may hold, which is a major source of profit and risk for the companies, has been subject to limits that were put in place last year after they were involved in multibillion-dollar accounting scandals.
Rumor swept through the market yesterday that regulators might relax the limits, although analysts who follow the companies said they knew of no evidence that that would happen.
A spokeswoman for the federal agency involved, the Office of Federal Housing Enterprise Oversight, declined to comment on the subject, as did Fannie Mae spokesman Chuck Greener and Freddie Mac spokeswoman Sharon McHale.
An industry source said, however, that Fannie Mae has asked OFHEO to raise its limit. The source spoke on condition of anonymity because the information was obtained confidentially.
Freddie Mac chief financial officer Anthony S. "Buddy" Piszel told analysts in a June conference call that his company was "beginning discussions" with OFHEO about removing the cap.
Some lenders are looking to the government-sponsored firms to help them out of a market crunch. Michael Perry, chairman and chief executive of lender IndyMac Bank, said last week that he had called on Fannie Mae and Freddie Mac "to step in and provide additional liquidity."
At the end of June, Freddie Mac's investment portfolio totaled $703 billion, below the limit of $724 billion, "so there is room to grow the portfolio even under the limit today," said Freddie Mac spokesman Michael Cosgrove.
Fannie Mae's portfolio totals $722.5 billion; it has a cap of $727 billion.
Gary Gordon, an analyst with Portales Partners, said he did not expect regulators to lift the caps. He pointed out that the two companies do not need to buy mortgages to pick up slack in the market. Instead, he said, they can package them for other investors, because the demand is strong for mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac.
Also lifting the two companies' share prices yesterday was a sense that they might profit from weakness elsewhere in the mortgage market, said analyst Josh Rosner of Graham Fisher, a New York-based investment research firm. Rosner did see this as necessarily a good sign. "While others may drown, Fannie and Freddie may escape with cuts and bruises," he said. "But cuts and bruises are still not a positive outcome."