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Worries of a Bailout of Mortgage Giants Hit Markets Hard

The market value of mortgage giants Freddie Mac and Fannie Mae slumped again Friday, but rebounded after officials downplayed the likelihood of government action. A reporter and analysts discuss the developments.

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  • JEFFREY BROWN:

    It was another tense day in a terrible week on Wall Street for mortgage giants Fannie Mae and Freddie Mac, as their share prices fell still further.

    The companies' market value has dropped more than 80 percent — or more than $120 billion combined — since a year ago.

    President Bush was briefed by Treasury Secretary Henry Paulson this morning.

    GEORGE W. BUSH, President of the United States: Freddie Mac and Fannie Mae are very important institutions. We spent a fair amount of time discussing these institutions, and he assured me that he and Ben Bernanke will be working this issue very hard.

  • JEFFREY BROWN:

    The Federal National Mortgage Association, nicknamed Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac, were created by Congress decades ago to provide a steady stream of money for home mortgages.

    They're unusual entities, private companies traded on the stock market, but also operating as government-sponsored enterprises, or GSEs, with a widespread sense that they have the guarantee of the government behind them.

    They are by far the largest providers of home loan financing, owning or guaranteeing about $5 trillion of mortgages, more than half the total outstanding.

    But in the mortgage foreclosure crisis, Fannie and Freddie have lost more than $11 billion. And investors worry they'll be unable to raise enough cash to continue buying mortgages.

    According to news reports, a government takeover and other possible contingency plans are under consideration in the event of a failure.

    Today, though, Treasury Secretary Paulson tried to stem such fears, with a statement that the government intended to keep Fannie and Freddie intact. Yesterday, he told members of Congress that the two companies had enough reserves to withstand mortgage losses.

  • HENRY PAULSON, U.S. Treasury Secretary:

    Fannie Mae and Freddie Mac are also working through this challenging period. They play an important and vital role in our economy and housing markets today, and they need to continue to play an important role in the future. Their regulator has made clear that they are adequately capitalized.

  • JEFFREY BROWN:

    For their part, the companies maintain they have enough capital to get through the current turmoil.

    And to further explore this story, we turn first to Charles Duhigg of the New York Times.

    Well, Charles, I said these are unusual entities, but fill that in for us. Why were they set up this way? And what role have they come to play in the nation's housing market?

  • CHARLES DUHIGG, The New York Times:

    They were set up to provide greater liquidity for the mortgage marketplace. Basically what Fannie Mae and Freddie Mac do is they go to banks, and they buy mortgages, and they package them and then resell them to investors. Some of them they keep for themselves. And by doing so, they give banks fresh money to go out and make other loans with.

    Over the last couple of decades, they've become increasingly important to how the mortgage economy works. At this point, basically today they are buying all of the mortgages that are out there. And so as a result, the way that the wheels of the mortgage economy keep on turning is because Freddie and Fannie keep on putting more money out there for banks to loan.