Why the troubles at Fannie and Freddie are yours

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The big mortgage news locally yesterday was IndyMac’s dramatic exit from the mortgage business, at a cost of 3,800 jobs. But investors knew IndyMac was toast, and something like this was coming -- that’s why IndyMac has been a penny stock lately.

The bigger news -- at least financially -- was the sharp sell-off in shares of Fannie Mae and Freddie Mac, which is Wall Street’s way of saying the following: the housing and mortgage markets are deteriorating, and Fannie and Freddie are going to need to raise money to survive. If you don’t believe Wall Street’s analysis, take it from the Fed chairman this morning: ‘The financial turmoil is ongoing, and our efforts today are concentrated on helping the financial system return to more normal functioning,’ Ben Bernanke said in a speech in Virginia.

The New York Times on the Fannie/Freddie selloff: ‘Fannie Mae and Freddie Mac are the largest U.S. buyers of home mortgages, and traditionally the government’s backstop for the housing economy. But with the plunge Monday, each of these ‘government-sponsored enterprises’ has now lost more than 60 percent of its market value this year. The declines, along with a falling stock market and growing unease about the possibility of more losses at big banks, reflect a growing consensus among investors that the current housing slump will last longer, and prove more severe, than initially feared.’

More: ‘ ‘If Fannie or Freddie ever became critically undercapitalized, their regulator would have no choice but to put in place a taxpayer rescue,’ said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company.’

It’s received wisdom at this point that Washington will find a way to bail out Fannie and Freddie if they run into deep trouble. With your money, of course. It’s a question I’d like to see put to Obama and McCain, just to understand their thinking on the issue -- would they support such a bailout?

Your thoughts? Comments? E-mail story tips to peter.viles@latimes.com.
Photo Credit: Bloomberg News