Did Market Overreact on Fannie, Freddie?
Analyst: Investors responded too quickly to worries about the mortgage giants.
July 14, 2008 — -- It's a scary time throughout the mortgage industry these days, but was the sudden panic over Fannie Mae and Freddie Mac justified? It's a question some are asking as the government seeks to shore up two mortgage giants whose shares have lost half their value in recent weeks.
Former St. Louis Federal Reserve President William Poole last week said the two companies were technically insolvent. The news helped drive Fannie Mae's and Freddie Mac's stocks to dramatic lows, and their slides continued today: Fannie closed at $9.73, down from $19.51 two weeks ago -- while Freddie ended the day at $7.11, down from $16.40.
Alan Skrainka, the chief market strategist at Edward Jones, a St. Louis investment firm, said the market may have overreacted to comments made by Poole, who has been outspoken about his opposition to government-sponsored enterprises like Fannie and Freddie.
"I think the market's very nervous right now," Skrainka said. "I think they grabbed a hold of this remark, this 'technically insolvent' remark, without thinking it through."
In recent months, defaulted home loans have forced the companies to post a combined loss of $11 billion.
But Art Hogan, the chief market analyst at Jefferies & Co. Inc., a New York-based investment bank, said the market has priced Fannie and Freddie at "the worst-case scenario," rather than the current one.
"I think that fear or greed always drive the market," Hogan said. "It's one or the other, and right now it's fear driving the market. ...Whether it's irrational or not is yet to be determined."
Hogan said investors were worried that the two mortgage companies -- which hold $5 trillion in mortgages, half of all the mortgage debt in the U.S. -- would eventually become exposed to so many mortgage defaults that they would run out of the capital needed to cover their losses.
Unlike many lenders, Fannie and Freddie don't buy high-risk "alt A" or subprime loans, instead preferring conservative, fixed-rate loans. But, in this economy, even those loans are at risk of default, analysts said.
