Investors Dump Securities From Fannie, Freddie

Guarantees from Freddie Mac and Fannie Mae had been regarded as on par with those from the U.S. government. (By Joshua Roberts/Bloomberg)

Fannie Mae spokesman Brian Faith declined to comment on the widening spreads.

Fannie Mae and Freddie Mac have been largely prohibited from taking on the biggest and riskiest loans. Until recently, they were barred from taking on individual mortgages of more than $417,000. To help boost the nation's flagging economy and increase the availability of "jumbo" mortgages, the government recently boosted the maximum amount in parts of the country with relatively high housing costs. In the Washington area, the limit was raised to $729,750, a federal agency announced yesterday.

The impact of that step depends in part on the ability of Fannie Mae and Freddie Mac to sell securities based on the larger mortgages.

Federal policymakers also have been counting on Fannie Mae and Freddie Mac to provide relief for homeowners facing foreclosure by taking on and renegotiating their loans.

In addition to securitizing mortgages and mortgage-backed securities, Fannie Mae and Freddie Mac buy them for their own investment portfolios. But their ability to buy is limited by their need to hold prescribed amounts of capital as a cushion against losses.

The deterioration in the market for Fannie Mae and Freddie Mac securities heightens a dilemma facing their regulator, the Office of Federal Housing Enterprise Oversight: whether to relax the companies' capital requirements.

Reducing the capital requirements could enable the firms to buy more of their own securities and compensate for the lack of demand from other investors. But doing so could also expose them to greater risks.

Both companies are already facing serious trouble. They have been reporting billions of dollars in losses and have issued billions of dollars of preferred stock to shore up their diminished capital. Meanwhile, their stocks have been sinking.

"OFHEO continues to believe, as do the Enterprises, that a strong capital position is extremely important in this market," OFHEO director James B. Lockhart III said in a statement.

Fannie Mae's stock yesterday fell 10.6 percent, to $21.70, and Freddie Mac shares fell 6.9 percent, to $20.14. Those were their lowest closing prices since the mid-1990s, according to Morningstar, and far from their highs for the past year of $70.57 and $68.12, respectively.