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Strategies & Market Trends : Freddie Mac (FRE) pops the housing bubble

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From: james-rockford8/25/2008 2:53:54 PM
   of 50
FRE debt sale very well received:

Freddie debt sale eases concerns of nationalization
Monday August 25, 1:17 pm ET
By Al Yoon

NEW YORK (Reuters) - Ailing mortgage finance company Freddie Mac easily sold $2 billion of short-term debt on Monday, reassuring investors that it and rival Fannie Mae can fund operations without a government takeover.

Fannie Mae (NYSE:FNM - News) shares rose 9 percent, and Freddie Mac (NYSE:FRE - News) stock gained more than 22 percent in early afternoon trading in New York. Broader markets tumbled.

An analyst said the government-sponsored enterprises (GSEs), which own or guarantee nearly half of the mortgages in the United States, were unlikely to be nationalized, which also soothed market jitters.

Investors have been dumping their stock and have pushed the shares down more than 90 percent since March on fears the housing slump will leave the two insolvent without emergency support from the government.

Freddie Mac on Monday sold $1 billion each in three- and six-month bills, with a measure of bids stronger than its sale earlier this month. Freddie Mac and Fannie Mae must routinely issue debt to refinance maturing issues that fund their combined $1.5 trillion in mortgage investments.

"The GSEs continue to have access to funding," said Rajiv Setia, a strategist at Barclays Capital in New York. If higher rates are paid for that funding, it will get passed on through higher consumer mortgage rates, however, he said.

The companies' ability to sell debt relatively cheaply is crucial not only for their existence but because they are the only large providers of money for the depressed housing market as the credit crunch sidelined banks and Wall Street investment firms.

Investors have feared that as mortgage defaults pile up and erode the two companies' capital, the U.S. Treasury would intervene, supporting their access to credit markets but leaving shareholders with nothing.

Citigroup analyst Bradley Ball, who has held a "buy" rating through turmoil surrounding the GSEs, challenged that premise.

"The recent GSE sell-off has been surprising, since the only catalyst was apparently a press report suggesting that federal officials are likely to recapitalize the GSEs soon," Ball wrote. Nationalization is unlikely, he said.

Citing an unnamed source, Barron's last week reported a government recapitalization of Fannie Mae and Freddie Mac was increasingly likely and that losses could go beyond common stock to preferred shares and subordinated debt.

Ball increased his "risk" rating on the two companies to "speculative" from "high," while keeping a "buy" on the shares. Ball slashed his target prices on Fannie Mae and Freddie Mac by more than half to $9 and $6, respectively.

In early afternoon New York trading, shares of Freddie Mac soared 23 percent to $3.45 and Fannie Mae shares climbed 9 percent to $5.46.

Ball wrote that options for Treasury Secretary Henry Paulson and the companies include an equity investment by the Treasury, a loosening of capital surplus requirements by their regulator, a sale of mortgage bonds to free up capital, or nothing until market conditions improve.

"We continue to watch market developments," Treasury spokeswoman Brookly McLaughlin, told reporters. "We continue to be in touch with the companies and their regulators and continue to stay on top of this."

The Treasury still believes that the mortgage finance giants should remain shareholder-owned, a source familiar with Treasury thinking told Reuters on Friday.

McLaughlin said that the Treasury's new GSE adviser, Morgan Stanley, was not expected to issue a formal, public report on its recommendations to the Treasury regarding its temporary backstop authority. Rather, there would be "exchanges of information" between Morgan Stanley and the Treasury through the end of Morgan's contract in January.

Yield spread premiums on the corporate "federal agency" senior debt issued by Fannie Mae and Freddie Mac increased slightly after narrowing sharply last week. Investors believe a government bailout would make the debt more like U.S. Treasury securities, and remove the risk implied by the spread.

Fannie Mae on Monday announced it would tap the debt markets for $2 billion in three- and six-month bills.

(With reporting by Julie Haviv in New York and David Lawder and Patrick Rucker in Washington; Editing by Tom Hals)
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