Despite Lifelines, Concerns Linger on Mortgage Giants

The federal government's assistance plan for Fannie Mae and Freddie Mac steadied the financial markets yesterday but failed to end concern about the future of the mortgage finance giants.

The plan, announced Sunday evening after an intense weekend of behind-the-scenes negotiations, arrested the steep declines that the companies' stock had been experiencing over the past week. The government's backing also allowed Freddie Mac to successfully sell $3 billion in debt securities, a sign that investors still had confidence in the firms, analysts said.

On Capitol Hill, congressional leaders from both parties expressed broad support for the arrangement worked out by the Treasury Department and the Federal Reserve. Senior House lawmakers said they planned to include help for the plan as part a housing relief bill Thursday and send it to the Senate, which is preparing to approve the measure next week.

Still, the companies' condition remained under close scrutiny and even their top officers said they understood that difficult times were ahead. "I hope that we will look back on this announcement and say this was a very important moment in breaking the back of a lot of market fears," Daniel H. Mudd, Fannie Mae's chief executive, said in an interview yesterday. "But it's way too early to say that, and we must remain vigilant."

A Goldman Sachs analyst predicted yesterday that the companies could face substantial future losses on their $5.3 trillion of mortgage guarantees and investments. The analyst, Daniel Zimmerman, said the companies are particularly vulnerable to loans made as recently as last year and in states with exceptionally troubled housing markets.

Meanwhile, the steps the government could take to stabilize Fannie Mae and Freddie Mac may have their own economic downsides. Lending the companies lots of money or investing heavily in them could increase federal borrowing and boost inflation. Alternatively, if the firms are forced to sell off a lot of their mortgage-related investments to cover losses, they could wind up lowering the value of such securities, indirectly raising mortgage rates and putting downward pressure on home prices.

For now, the government's actions appear to reduce the danger that any short-term problems at Fannie Mae or Freddie Mac would disrupt the mortgage market.

"The federal government has done what it can to assure that Fannie and Freddie are too big to fail," said Walter N. Schmidt, senior vice president of FTN Financial Capital Markets.

Such assurances did little to allay shareholders' worries that they would lose out if the government decides it needs to buy an unspecified ownership in the firms, as the Treasury Department has proposed. Shares of Fannie Mae yesterday fell 5.1 percent from their deeply depressed level at the end of last week, and shares of Freddie Mac declined 8.3 percent.

Some large shareholders said they took solace in the fact that the companies are still investor-owned.

"It's not a takeover, not a nationalization," said an analyst whose company is among the 10 largest investors in Fannie Mae and Freddie Mac, and who spoke on the condition of anonymity because the firm does not comment publicly on its holdings. "The government has to come out and calmed investors."

Lawmakers said they wanted to get the housing bill to the president soon. "I do think there's a reason for speed," said Barney Frank (D-Mass.), chairman of the House Financial Services Committee.