Mortgage stocks cut losses in frantic NYSE trading

The losses in shares of two huge U.S. mortgage companies and guarantors, Fannie Mae and Freddie Mac, eased in New York trading on Friday afternoon after a key U.S. politician said the companies were sound.

3-month New York trading in Fannie Mae

Stock in the two companies, which have a public policy role in the U.S. housing market but are owned by investors, crashed Friday after the New York Times reported the U.S. government might have to take over one or both of them. The paper cited unnamed sources.

Together, they back or hold nearly half of the total $12 trillion US in mortgages. Concern about rising defaults and foreclosures has cut the stock price of the two companies, but the fall turned into a rout early Friday, even though the Times said no government action is imminent.

But the losses shrank after Senate banking committee chairman Christopher Dodd said the companies have access to the capital they need. He said he talked with Federal Reserve chairman Ben Bernanke and U.S. Treasury Secretary Henry Paulson, and that the two are "looking at various options" for supporting the companies if they need it.

Moreover, some analysts said there was no fundamental reason for the price drops.

Freddie Mac stock closed down just 25 cents to $7.75 in New York Stock Exchange trading, after falling as low as $6.68.

Fannie Mae was off $2.95, to $10.25. It touched $6.68 in early trading.

The volume was huge, with a combined total of 800 million shares changing hands. The two together usually trade about 40 million shares a day. The 800 million is equal to half the total volume of all stocks traded in New York on a typical day.

Freddie Mac was as high as $14.50 on July 3, the last trading day last week, and peaked at $67.20 in the past year. Fannie Mae was at $18.78 on July 3, and the 52-week high is $70.57.

3-month New York trading in Freddie Mac

Karen Shaw Petrou, from the Washington consultants Federal Financial Analytics, said observers were expecting the government to act.

A 1992 law allows the government to take over operations that get into serious trouble by placing them in conservatorship. The stock would be almost worthless if that happened, the Times said.

The two companies buy mortgages and repackage them as investments, a key role in the financial underpinnings of U.S. home ownership.

"Without them, our economy would collapse," Piper Jaffray analyst Robert Napoli said in a note to clients.

Fannie Mae's website said it has a public mission "to expand affordable housing and bring global capital to local communities in order to serve the U.S. housing market."

It exists to ensure mortgage lenders have enough funds to lend to homebuyers at low rates.

Freddie Mac finances housing for low- and moderate-income families by ensuring there's a stable supply of money for lenders to make the loans new homebuyers need.

The names are based on the acronyms for the companies: Federal Home Loan Mortgage Corporation (Freddie Mac) and Federal National Mortgage Association (Fannie Mae).

The concern about mortgage companies spilled over into trading of investment bank Lehman Brothers Holdings Inc. It has been battered by fears it might fail, and the stock lost another $2.87 Friday, falling to $14.43.

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