Fannie, Freddie shares lose 25 percent of value

“It could be tomorrow, it could be six months from now,” Miller said.

The Bush administration on July 13 unveiled a plan to provide unlimited government loans to the two mortgage giants and to purchase stock in the two companies if needed for a period covering the next 18 months.

Critics charged that the open-ended nature of the support for Fannie and Freddie would expose taxpayers to billions of dollars of potential losses.

Treasury Secretary Henry Paulson has insisted that the package needed to be structured in this way to boost financial markets’ confidence as the companies deal with mounting losses from mortgages that have gone bad.

But investors started dumping shares of Fannie and Freddie this week after a Barron’s article on Saturday — citing an anonymous Bush administration source — said the government is pressing the companies to raise more money to guard against losses but doesn’t expect them to succeed.

The Barron’s report said the government is likely to buy preferred stock in the companies, wiping out common shareholders. Paulson has declined to comment on whether a rescue is imminent.

Many observers say Paulson is not interested in shareholders and only in Fannie and Freddie’s ability to provide support to the battered mortgage market. That means a government rescue might not occur until there is evidence the mortgage companies’ are unable to sell short-term debt — an indication they would no longer be able to operate normally.

Bert Ely, a banking consultant and longtime critic of the mortgage companies said, “the rationale for government involvement is to maintain (Fannie and Freddie’s) role in the marketplace, which comes through buying mortgages.”

A recent debt auction by Freddie Mac indicated the sale of short-term debt is becoming more difficult and expensive.

On Tuesday, a $3 billion offering of five-year notes by Freddie Mac was priced at 1.13 percent above five-year U.S. Treasury notes. That’s up from May, when Freddie Mac’s notes were priced at just 0.69 percent above Treasury notes of a similar length.

The current lack of action by both Fannie and Freddie to raise capital, coupled with the government’s silence, is freezing up liquidity in the mortgage market, Miller said. And that’s trickling down to traditional retail banks that rely on Fannie and Freddie to purchase loans and provide cash to make new mortgages.

“Until they get funding,” Miller said, “it hurts everyone.”

Also in msnbc.com business Your Career: The repercussions of expressing your faith Interactive: 10 cars we’re looking forward to in 2010 ConsumerMan: Gift of giving takes on whole new meaning ‘Reaching out’ and the other worst buzzwords of the year   Video: Shoppers and shippers in a race to the finish

MORE FROM STOCKS & ECONOMY

Stocks & economy Section Front

Stocks end a day of dealmaking with gains Economists: We don't need more stimulus Few borrowers helped by modified mortgages  On eve of OPEC meeting, calm in oil markets Rebound leads AP’s top business stories of ’09 Investors want to believe in ‘Santa Claus rally’ Cost of gas falls nearly 4 cents in last two weeks OPEC unlikely to change production targets Fewer states add jobs in November NYT: Taxpayers at risk with mortgage giants Stocks & economy Section Front   Add Stocks & economy headlines to your news reader: