THE slides in Fannie Mae and Freddie Mac, the largest providers of United States mortgage financing, threaten to deepen the economic slowdown by curbing credit to a housing industry already in its worst recession in 25 years.
The two companies' shares reached the lowest level in more than 17 years on Friday, Bloomberg News reported.
This will make it tougher for them to raise capital at a time when they account for about 80 percent of mortgages packaged into bonds. A failure of the companies would likely send home-loan rates higher, causing further declines in home sales and prices.
The dangers mean the Bush administration, which on Friday indicated a government takeover was not needed, must be ready to keep the firms afloat, investors said.
Law makers aim to take up a housing bill this week to help buttress confidence in Fannie Mae and Freddie Mac.
"There is no way the federal government is going to let either of those agencies die," said Eric Hovde, chief executive officer of Hovde Capital Advisors LLC, which runs a US$1 billion hedge fund. "You can't take housing, which is the most important asset class in the country, and mortgages, which are the largest debt markets, and destroy them."
Fannie Mae and Freddie Mac own or guarantee about half the US$12 trillion in US home loans outstanding.
Even if the government stepped in with some type of rescue, mortgage rates may rise as much as half a percentage point as the cost of selling mortgage-backed securities rose, said Keith Gumbinger, vice president of mortgage research firm HSH Associates in Pompton Plains, New Jersey.
"No matter how this turns out, you have to think" the mortgage market "is going to be under more strain," said Brian Sack, a senior economist at Macroeconomic Advisers LLC in Washington, who once worked at the Federal Reserve.
"That is a headwind for the economy, and something the Fed will have to take into account" in considering when to raise interest rates.
Fed Chairman Ben S. Bernanke will deliver updated quarterly forecasts when he gives his semi-annual testimony on the economy to Congress this week. Traders anticipate the central bank will raise rates this year to head off an acceleration in inflation spurred by oil and food costs.
The Fed, which opened lending to investment banks in March in the first extension of credit to non-banks since the 1930s, is looking at options for Fannie Mae and Freddie Mac along with other agencies.