The U.S. officials may need to bail out the two government-sponsored enterprises responsible for insuring mortgages, a former Federal Reserve president said.
William Poole, who stepped down as President of the Federal Reserve Bank of St. Louis three months ago, called Fannie Mae and Freddie Mac "insolvent."
"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole told Bloomberg on Wednesday.
Fannie Mae and Freddie Mac have seen their shares and debt pummeled in the past week on speculation the mortgage giants were bleeding funds and will be forced to raise capital. They are trading at their lowest levels since 1992. The selloff is continuing on Thursday, with shares of Fannie and Freddie down 4.6% and 9% respectively in pre-market trading.
Debt issued by the mortgage lenders carries an implicit government guarantee but has been pummeled nonetheless. The yield spread between treasuries and agencies has spiked from 60 basis points to 100 basis points in the past month, including 9 basis points on Thursday. Credit default swaps are treating the AAA-rated debt as if it were five levels lower.
Company data shows Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter and the value of Fannie Mae's assets may be negative next quarter.
A spokesperson for Fannie Mae was quoted as saying the company can "fulfill our congressionally chartered mission now and in the future." A spokesperson for Freddie Mac said the company is "well capitalized and positioned to continue." He added that Poole is "a long-time critic."
By Adam Button and edited by Cristina Markham