Mortgage giants lose billions

The countries two largest agency lenders disappointed wall street this week. Both companies have announced a drastic reduction of their dividends as they fight to preserve working capital in the difficult housing markets. Fannie Mae and Freddie Mac are essentially the only agancy lenders that are purchasing mortgage backed loan securities.

The secondary marketplace for mortgage loans has been a disaster for the entire year. As home prices continue to move lower, investors are growing increasingly weary of purchasing anything that is tied into the housing or credit markets. The spread on mortgage securities is continuing to climb, putting pressure on mortgage rates to move up despite the drop in recent oil prices and reduction of inflationary challenges in the market.

Fannie Mae and Freddie Mac are now looked at to be the secondary market, along with FHA that will help to guide the country out of the housing mess. The major concern is that both lenders operate a business model that is highly leveraged and requires adequate levels of capital to balance their debts. The companies will likely need to raise billions of additional capital to help navigate the next few quarters until the housing market shows signs of bottoming out. The companies will have the benefit of borrowing money from the government if necessary and gaining working capital if they can not find this in the open markets.