Freddie Mac passed its first test of investor confidence on Monday as buyers flocked to its $3 billion sale of debt just hours after the U.S. government pledged to extend more credit or buy shares in the nation's largest mortgage finance companies.
Nerves remained raw in financial markets after last week's steep decline in shares of Freddie (FRE.N) and its sister company Fannie Mae (FNM.N), which together finance about half of U.S. homes. Even after the government stepped in and Freddie's routine debt auction went off without a hitch, investors remained wary and shares in both companies swung wildly amid uncertainty about what the government plan means for shareholders.
That lack of clarity was echoed across Wall Street, where major stock indexes were mixed as investors remained concerned about the health of the economy after the regulators seized IndyMac Bancorp Inc, one of the largest bank failures in U.S. history.
On Sunday, the Treasury Department agreed to raise Fannie and Freddie's credit lines above the existing $2.25 billion apiece and buy shares to strengthen their finances if needed. The Federal Reserve offered to let the agencies borrow at the rate it charges banks for direct loans.
"Ultimately, we do not view these measures, dramatic as they look, as either a turning point for the U.S. housing market or as a sign that the downturn will be much worse than previously believed," Goldman Sachs economist Jan Hatzius wrote in a note to clients.
"They simply reaffirm our long-held — and widely shared — view that the government will do everything it can to avert a meltdown in the conforming mortgage market and will continue to stand behind the government-sponsored enterprises," he said.
The two companies rely on regular debt auctions for funding, and any disruption in the flow of money could push up mortgage rates and deal a fresh blow to a sinking U.S. housing market and fragile economy.
The housing crisis and subsequent credit contraction have prompted banks to tighten lending terms, leaving Fannie and Freddie as the dominant source of mortgage financing.
Monday's debt sale from Freddie drew stronger demand than a similar one on July 7. Fannie announced that it will sell $3 billion worth of debt on Wednesday.
The White House said Fannie and Freddie had not tapped any of the lifelines offered by the Treasury and Fed on Sunday.
"As far as I know, neither of the companies have gone forward to take advantage of any of the borrowing opportunities," White House spokeswoman Dana Perino told reporters. "Both of their regulators have stated that the companies are well-capitalized."
Shares in Freddie Mac were about 3 percent higher at $7.97 and shares in Fannie Mae rose about 5 percent to $10.80. Both shares traded up as much as 25 percent as well as fell into negative territory in a volatile session. (Reuters)
