Shares of Fannie Mae and Freddie Macfell Wednesday on fears the two housing finance companies will need to raise billions of dollars in additional capital through stock sales, diluting the holdings of current investors.
Earlier this week, concern that a proposed accounting rule would require the companies to raise billions in capitaladded to investors' jitters over whether the government-sponsored enterprises can withstand more losses and support housing.
Freddie Mac shares slid 9.1 percent to $12.23, while Fannie Mae shares fell 3.4 percent at $17.02.
"They're going to have to raise capital going forward, it's going to be diluted transaction (and) there's nothing we can do about it" said Weston Boone, a vice president of listed trading at Stifel Nicolaus Capital Markets in Baltimore.
"Fannie and Freddie will continue to lend, continue to be the majority of the mortgages in this country." Accounting rule makers are considering a move that could force companies to account for securitized assets, such as mortgage-backed securities, on their balance sheets.
A strict reading of that rule would force Fannie Mae and Freddie Mac to raise billions of dollars of capital to support trillions in MBS, according to a Lehman Brothers report on Monday.
The regulator for Fannie Mae and Freddie Mac on Tuesday eased some concerns, saying any accounting rule change will not require a massive capital increase by the two companies.
But several analysts and the former head of the GSEs' regulator, the Office of Federal Housing Enterprise Oversight, said it will be difficult for Fannie and Freddie to sidestep the proposed accounting rules.
"OFHEO does not have the flexibility to ignore generally accepted accounting principles," Armando Falcon, who headed the Office of Federal Housing Enterprise Oversight through May 2005, told Reuters in an interview.
Bobby Harrington, head of block trading at UBS in Stamford, Connecticut, said the likelihood of an accounting rule change forcing them to raise capital is slim.
"But what it (the Lehman report) did was point out the exposures they have.
The question is: 'At some point, do they have to become more well capitalized down the road?' "That's probably got people saying they're going to take a wait-and-see approach.
They may be going more to the credit side than the equity side of the equation because you're higher up the ladder on debt."