Things Look Bad for Freddie and Fannie

At the end of Monday's trading shares of Freddie Mac were down 25% and shares of Fannie Mae were down by 22%. To make matters even worse, both stocks are down over 90% from a year ago.

This huge drop in price is attributed to market concern that the two mortgage giants will be unable to avoid a government bail out. The reason being that Freddie and Fannie will not be able to raise enough money to offset resent losses due to mortgage defaults.

To matters even more worse, the price of Freddie and Fannie bonds have fallen and the spreads between Freddie and Fannie debt to Treasuries have widened to an increase in yield. Yields on debt instruments increase as risk in the issuer rises in order to compensate bond purchasers for the decreased likelihood that they would see a return of principal and future cash flows from interest payments.

With total losses between the two firms totaling over $14 billion in the last four quarters, it's hard to see how this is going to play out.