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Fannie, Freddie Race Banks To Bottom

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Bailout could cost taxpayers $25 billion.

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Uncle Sam: Friend, soft touch, regulatory lummox, occasional sap and...competitor in the sagging housing market?

Fannie Mae (FNM) and Freddie Mac (FRE) may be unintentionally driving down prices in already depressed markets to the detriment of commercial lenders such as Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC) and Wachovia (WB).

In Michigan, Fannie Mae couldn't unload a three-bedroom house for $6,900 at a foreclosure sale, forcing a price cut to $5,000. The house sold for $110,000 three years ago.

Such sales add to the downward pressure on surrounding properties' prices in what may already be a depressed area - and it comes from a federal agency that's intended to backstop the housing industry in tough times. In extreme cases, this could lead to blight and a continued downward spiral in prices.

Fannie Mae and Freddie Mac, the two largest U.S. mortgage financing institutions, held foreclosed houses valued at a total of $6.9 billion on March 31. Foreclosed properties held by the nation's commercial banks and savings and loans totaled $8.6 billion.

Like the house in Michigan, foreclosed properties typically sell at a steep discount. This suggests the need to sell quickly before prices go any lower. Either way, foreclosure sales are bad news for the nation's taxpayers and commercial banks.

The irony: Fannie and Freddie may be racing commercial institutions to the bottom -- or something close to it -- and the two government-sponsored entities may be fueling the commercial lenders' freefall.

Congress created Fannie Mae in 1938 as part of President Roosevelt's plan to revive the economy during the Depression; Freddie Mac was launched in 1970. The agencies are now the chief providers of mortgage financing; they own or guarantee about 80% of the mortgages originated this year.

The downbeat housing market has touched off fears about their solvency and their stock price has been getting pounded. Fannie Mae recently traded at $15.84 a share, with a 52-week range of $6.68 to $70.57. Freddie Mac recently fetched $10.94 a share; the 52-week range is $3.89 to $67.20.

Treasury and Federal Reserve officials have announced plans to back the companies. Speaking Tuesday in New York, Treasury Secretary Henry Paulson said the stability of Fannie and Freddie are the key to easing uncertainty about U.S. financial markets.

Members of Congress are currently working out a deal that would allow Uncle Sam to help Fannie Mae and Freddie Mac in an emergency. The deal would revise supervision of the agencies and allow the government to insure up to $300 billion in refinanced mortgages.

Congress plans to include $4 billion in the bill to help local governments buy and rehabilitate foreclosed houses. President Bush opposes this provision but backs other sections of the bill; it's not clear whether he'll sign it into law or veto it as threatened.

The Congressional Budget Office, a nonpartisan agency, says a temporary measure to back Fannie and Freddie could cost taxpayers as much as $25 billion.

Fannie and Freddie aren't yet selling apples to each other, but the trend is clear: Taxpayers of America, open your wallets.
No position in stocks mentioned.
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