Mortgage stocks have experienced selling pressure Monday morning after Barron's reported government officials anticipate mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) will fail to raise enough needed capital.
Shares of mortgage heavyweights Freddie Mac and Fannie Mae have each suffered substantial losses, down about 13% each.
Around 11:30 am Eastern Time, shares of Fannie Mae were down $1.07 at $6.84 while Freddie Mac's stock was down 77 cents at $5.05.
Meanwhile, shares of Felcor Lodging Trust Inc. (FCH), Apartment Investment & Management Co. (AIV) and Annaly Mortgage Management Inc. (NLY) are also posting notable losses.
According to a report by Barron's, the U.S. Treasury Department may need to bail out Fannie and Freddie in the upcoming months using taxpayer dollars.
The article noted that such an action could wipe out existing holders of the companies' common stock, with preferred shareholder and possibly holder of the two firms' $19 billion of subordinated debt also taking losses.
According to the Barron's report, the equity injection would nearly double the U.S. debt and may leave both Fannie and Freddie with $50 billion in the red for its asset value.
Before the opening bell on Monday, Freddie Mac announced plans to issue a new $3 billion five-year reference note security.
Freddie Mac said its new five-year reference notes will be offered through a syndicate of dealers including Citigroup, Deutsche Bank and Merrill Lynch, with the latest issue set to be priced on Tuesday and planned to be settled on Wednesday. The notes will be due on September 27, 2013.
Including this latest offering, Freddie Mac has issued $39 billion worth of notes during 2008 and has about $260 billion worth of outstanding reference notes and reference bonds securities.
The announcement came after fellow government sponsored enterprise Fannie Mae announced the pricing of its own new issue of three-year benchmark notes last Wednesday.
The issuing of new notes by Fannie and Freddie comes after the two firms received ratings cuts from Standard & Poor's about a week ago.
Standard & Poor's slashed its ratings on the bonds and the preferred stock of Fannie Mae and Freddie Mac, as the ratings agency sees the two companies presenting a greater risk to the government.
The ratings cuts come after both Fannie and Freddie reported increased credit losses for the second quarter and follow a new regulatory structure that would place subordinated debt and preferred stock investors at a disadvantage.
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