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Takeover will have winners, losers

Borrowers could see rates fall, but investors in Fannie and Freddie may get hit hard.

September 08, 2008|Walter Hamilton | Times Staff Writer

NEW YORK — The government's groundbreaking move Sunday to take control of Fannie Mae and Freddie Mac could give a much-needed boost to the housing market and the stock market as well.

But the development is bad news for anyone who owns stock -- common or preferred -- in the mortgage finance giants.

On the positive side, the federal intervention is likely to bolster confidence in the financial system in general and in the debt of Fannie and Freddie in particular.

That would help to lower mortgage interest rates, reducing costs for home buyers and making it easier to qualify for a home loan.

"This really can't hurt anything," said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Md. "If anything, it's going to make it easier to get a mortgage."

The prospect that the rescue will help stabilize the country's financial infrastructure -- a good thing for the economy -- could send stock prices up today.

In Asian markets, shares soared early today in reaction to the Treasury Department's steps.

But the rescue won't come without pain, and it won't solve the vast array of problems weighing on the economy and housing markets.

The takeover is expected to slam the already-depressed stocks of the two companies and may rattle other financial companies with exposure to them, experts said.

"By rights, the stocks should go to zero" when they open today, said Christopher Whalen, a partner at Hawthorne-based research firm Institutional Risk Analytics.

Under the Treasury plan, the shares might eventually have some value. But it could take years to know for sure.

Likewise, the companies' preferred shares -- which paid hefty dividends and were viewed more as bonds than stocks -- could well end up worthless, depending on how much taxpayer money Fannie and Freddie require to stay solvent. The dividend payments will cease.

The common shares "will become penny stocks and the preferreds are not far behind them," said David Kotok, chief investment officer of money manager Cumberland Advisors in Vineland, N.J.

Wall Street had expected the common shares to lose value under any rescue, but some investors -- including some shaky banks and insurance companies -- held on to their Fannie and Freddie preferred stock in the belief that the government would protect those investments.

Anxious investors may dump the stocks of financial companies in general until it becomes clear which ones are affected, analysts said.

Standard & Poor's and Moody's Investors Service on Sunday slashed their credit ratings on the companies' $36 billion in preferred stock to the level of "highest speculation, lowest quality."

The rescue also won't help homeowners who are behind on their loans or are stuck with houses they can't sell.

"There's nothing in this program that is solace for a person who is 25% upside down on a mortgage they can't afford," said Thomas Lawler, founder of research firm Lawler Economic & Housing Consulting. "This is not going to prevent a meaningful number of foreclosures, in and of itself."

Under its plan, the Treasury will buy a new class of senior preferred shares -- investing as much as $100 billion in each company -- and will get warrants giving the government the right to acquire a 79.9% stake in each company.

The Treasury also pledged to keep making interest payments to Fannie and Freddie bondholders and to buy previously issued mortgage bonds in the open market.

Those steps should provide a shot in the arm for the housing market by increasing demand for mortgage securities, leading to lower mortgage rates over time, experts said.

"If you're a homeowner, it should make it cheaper to obtain the conventional 30-year fixed mortgages that are Fannie and Freddie's bread and butter," said Mike Larson, a real estate analyst at Weiss Research in Jupiter, Fla.

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walter.hamilton@latimes.com

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Times staff writer Tom Petruno contributed to this report.

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