Page last updated at 23:24 GMT, Friday, 11 July 2008 00:24 UK

US mortgage firms' shares slump

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Shares in US mortgage firms Freddie Mac and Fannie Mae dropped by as much as 50% in rollercoaster trading on Friday amid concerns for their future.

Investors are concerned that the government may have to step in to rescue the two firms.

But the US Treasury said it would back them in their current form, helping their shares to recover some ground.

The companies are behind half of all US mortgages and have been hard hit by the slowdown in the US housing market.

The two companies play an important role in the financial markets in providing funding for home loans by buying up mortgages and packaging them as investments.

As mortgage backers, the companies have had to pay out when homeowners have defaulted on their loans.

Both firms defended their finances, saying they had enough capital to weather the housing slump.

'Important mission'

Shares in the two firms trimmed losses after US Treasury Secretary Henry Paulson signalled he was not on the verge of taking Fannie Mae and Freddie Mac into public hands.

President Bush reflects on tough times for the US economy

"Our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," he said.

President George W Bush was briefed on Fannie Mae and Freddie Mac earlier on Friday.

Mr Bush said Mr Paulson assured him that he and Federal Reserve Chairman Ben Bernanke "will be working this issue very hard".

After a volatile trading session, Freddie Mac shares closed down 3.1% at $7.75.

The stock had plunged as much as 51% shortly after the market opened and briefly vaulted into positive territory at one point.

Shares of Fannie Mae ended the day down 22.4% at $10.25 after sliding as much as 49% to a 19-year low of $6.68.

US Senator Christopher Dodd said the Federal Reserve was considering allowing Fannie Mae and Freddie Mac to borrow directly from the central bank, which also helped the shares to recover.

Lenders falter

Meanwhile, a California-based mortgage lender IndyMac was taken over by US regulators on Friday.

Earlier this week, the bank said that it would stop most lending, leading depositors to withdraw cash.

The US Office of Thrift Supervision said it had transferred IndyMac's operations to the Federal Deposit Insurance Corporation after determining that is unlikely to meet its depositors demands.

IndyMac had been struggling to raise funds and stay in business in one of the states worst hit by the US housing market slump.

'Unthinkable'

There has been a sense of unfolding crisis surrounding the companies this week according to the BBC's New York business correspondent, Greg Wood.

Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission
Treasury Secretary Henry Paulson

He added that it would be unthinkable that they could be allowed to fail.

While no longer government owned, Fannie Mae and Freddie Mac are government chartered, leading many to suggest that the Bush administration will be forced to step in.

'Important mission'

Mr Paulson responded to media reports that the Treasury was planning some kind of government-led rescue.

He said the Treasury was "maintaining a dialogue with regulators and with the companies".

He stressed that their regulator continued to work with them "as they take the steps necessary to allow them to continue to perform their important public mission".

Analysts said his comments suggested that there would be no sweeping bail-out of the two firms.

"While Mr Paulson is making supportive comments... there was no suggestion of any imminent bail-out - nor enough specifics to the support they would give," said Bret Barker, portfolio manager at Metropolitan West Asset Management in Los Angeles.

"The markets were looking for more from Mr Paulson."

Earlier this week, Freddie Mac and Fannie Mae's regulator stressed that the firms were "adequately capitalised".

This sentiment was also echoed by Mr Paulson and Mr Bernanke in testimony to the US Congress on Thursday.

The Office of Federal Housing Enterprise Oversight said they had large liquidity portfolios, access to the debt market and over $1.5 trillion in unpledged assets.




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