24/7 Wall St.

Part of the plan to fix the mortgage crisis is for Fannie Mae (FNM) and Freddie Mac (FRE) to buy more debt securities. To do that, they will need more capital, perhaps as much as $20 billion. According to Bloomberg “That’s the top end of the range,”  James Lockhart,director of the Office of Federal Housing Enterprise Oversight said,

Even in this day and age of multi-billion bail-outs, that is a lot of money. The companies will have to sell stock or bonds to raise capital. The may push their share prices down again because of dilution. The federal government probably does not want foreign capital to fund the new requirements. So, who does that leave?

Fannie and Freddie could price the securities at such a low point that pension funds and hedge funds might come into a deal  But, Freddie Mac’s market cap is already below $17 billion. Putting another, say $7 billion into the company could take the firm’s share price down to well below $15. It has a 52-week high of over $68.

The need of the government to solve the housing crisis is acute. Improving the balance sheets of the two companies so that they can do more to help homeowners is probably absolutely necessary to help fix the most critical crisis facing the economy.

But, should common shareholders be taken down to almost nothing in the process?

Douglas A. McIntyre