NEW YORK (CNNMoney.com) -- Shares of Fannie Mae and Freddie Mac tumbled again Thursday on a report that government officials have begun planning for a possible collapse of the mortgage finance giants.
The Wall Street Journal reported that Bush administration officials have held talks about what to do in the event the two government-sponsored firms falter.
The government doesn't expect the firms to fail and no rescue plan is imminent, according to the report. But it reported that talks, which it said had previously been part of normal contingency planning, have become more serious recently given the financial woes and downward spiral in their stock prices.
In addition, William Poole, the former president of the St. Louis Federal Reserve, told Bloomberg in a Thursday report that the companies are already "insolvent."
Treasury Secretary Henry Paulson tried to allay some of the concerns about the firms Thursday. In testimony to the House Financial Services Committee, he said the firms are "working through this challenging period."
And earlier this week James Lockhart, director of the Office of Federal Housing Enterprise Oversight, which regulates the two firms, said in an interview with CNBC Tuesday that he believes Fannie and Freddie have done a good job raising adequate capital.
But those attempts to calm investors had little effect. In early trading Thursday, shares of Fannie (FNM, Fortune 500) lost 11% while those of Freddie (FRE, Fortune 500) plunged 25%. Those losses are on top of the more than 60% declines in the two stocks already this year heading into Thursday.
Fannie and Freddie are crucial components to the nation's home lending industry, as they buy pools of mortgage loans and sell securities backed by the payments from those loans.
The two companies own or guarantee about $5 trillion of mortgages -- or nearly half of all U.S. home-mortgage debt outstanding.
"The housing market can not recover unless Fannie and Freddie are out there actively securitizing home mortgages," said Jaret Seiberg, financial services analyst for research firm Stanford Group.
The historic decline in home sales and values has already led to a sharp downturn in the economy So the viability of Fannie and Freddie is crucial to the nation's chances of an economic recovery.
"If Fannie or Freddie failed...it could throw the economy into depression or something close to it," Sean Egan, head of credit ratings firm Egan Jones, told Fortune earlier this week.
Because the shareholder-owned firms were set up by acts of Congress, they have always operated with the assumption that the federal government stands behind their guarantees.
But if Fannie and Freddie were unable to raise the funds to cover their rising losses, it is quite likely shareholders could have their holdings wiped out.
Shareholders are also concerned that rising mortgage defaults and delinquencies will cause additional losses for the firms, which in turn could force them to seek additional capital that will likely dilute the value of current shareholders' holdings.
But the rapid plunge in the stocks this week makes efforts to turn around Fannie and Freddie without a government bailout more difficult.
"The more the stock price goes down, the harder it is for them to raise capital -- which makes investors nervous," said Frederick Cannon, managing director at Keefe, Bruyette & Woods, earlier this week. "It is a vicious cycle."
Spokespeople at Fannie and Freddie both had no comment on the Journal report. Earlier this week they said they had no comment on the declines in the firms' stock prices.
Originally Posted by LiveFree79
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