Fannie, Freddie Slip After Key Gains

Share Prices Up For Week Despite Sell-Off at End

When shares of Fannie Mae and Freddie Mac dropped sharply yesterday, it marked a sour end to an otherwise unusually upbeat week for the ailing giants of mortgage finance.

Even including yesterday's declines, Fannie Mae's shares rose 37 percent on the week and Freddie Mac's shares climbed 61 percent as some analysts suggested that a government bailout might not be as pressing as many investors had supposed. The firms also succeeded in selling $3 billion in debt, paying more for the loans than they had in recent weeks but not so much that analysts found it worrisome.

But yesterday Fannie's shares fell 14 percent to close at $6.84 and Freddie's fell 15 percent to $4.51, a reminder that the companies face significant tests in reviving their financial health and restoring investor confidence.

The sell-off came with news that the Bank of China reduced its exposure to Fannie and Freddie's debt by 29 percent over the past two months. The companies have relied heavily on foreign investors, particularly in Asia, for support, but Asian participation in financing the companies has declined recently.

September kicks off a challenging autumn for District-based Fannie Mae and McLean-based Freddie Mac, which are the country's largest source of mortgage finance, as they seek financing from investors concerned about even greater losses at the firms.

The companies package U.S. mortgages into securities, which they guarantee and sell to investors. Fannie Mae and Freddie Mac also buy mortgage-backed securities and trade them. As the mortgage market has melted down, the companies have faced billions in losses.

Last month, Congress gave the Treasury Department authority to lend money to the mortgage giants or buy their stock to help prop them up.

A series of analyst reports helped Fannie Mae and Freddie Mac this week. The reports suggested that Fannie Mae and Freddie Mac have enough cash reserves to offset the growing losses.

Lehman Brothers analyst Bruce Harting wrote that with that capital, Fannie Mae "should get through this difficult housing cycle" and doesn't "need anymore externally raised capital."

Merrill Lynch analysts Kenneth Bruce and Cyrus Lowe wrote that "it is still premature to consider a Treasury sponsored recapitalization, in our view, as capital depletion would not likely occur for several quarters." The analysts said that the companies may not "need a capital injection," according to Bloomberg.

In addition, the companies sold short-term debt at rates that are still affordable for them and attractive to investors despite the risks posed by Fannie Mae and Freddie Mac's financial struggles.

The higher rates paid by the companies is partly attributable to the tight credit market facing all borrowers, some analysts said.