Shares of Freddie Mac and Fannie Mae were looking a little better in early trading on Tuesday after investors fled the two government sponsored entities (GSEs) the previous day over doubts that their underlying capital could make it more difficult for them to buy or guarantee mortgages. That, in turn, could make interest rates on new home mortgage loans rise sharply.
The concerns arose after Lehman Brothers reported that new accounting rules might require that the two companies raise billions in new funds. This led to investor concerns that raising new capital would require that the GSEs issue new stock which would further dilute investor equity.
Both stocks fell to their lowest levels in 14 years: Freddie lost $2.59 to end the day at 11.91 and Fannie was down $3.06 to 15.74.
However, James Lockhart, director of the Office of Federal Housing Enterprise Oversight, the agency that regulates Freddie and Fannie said early Tuesday that an accounting rule change should not direct capital changes at the two banks. At mid-morning Freddie was trading at $12.28, up $0.36 and Fannie at $15.91, an increase of $0.16.
However, financial market continued to roil and, according to The New York Times, Wall Street is starting to get the message that the worst is yet to come.
The Times quoted Florian Esterer, a fund manager at Swisscanto Asset Management in Zurich, who said that investors need to look beyond subprime problems to the "decline in the quality of home-equity loans, credit card debt, and commercial real estate. Banks seem to be "in denial about the degree of problems. There is much more pain to come than they are telling you."
Banks have written down more than $400 billion in assets since the beginning of 2007 and banks, insurance companies, and investment funds may reach $935 billion.
As stock prices have dropped it has become more difficult for companies to raise new capital. Freddie Mac had announced in May that it would sell $2.75 in new common stock, but now it will have to double the number of shares to raise the new funds. This will further dilute stockholders' equity as well as the price the new stock can fetch.