Wall Street Hates, Then Loves, Fannie Mae

After an ugly earnings betrayal, Wall Street and the government-backed mortgage behemoth try some make-up sex.

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Wall Street's love-hate relationship with Fannie Mae and Freddie Mac, the government-backed mortgage holders and guarantors, was on full display Wednesday as a spate of bad news followed by good news sent Fannie's shares bouncing down and up by some 25 percent intraday.

Early in the morning, Fannie announced that it lost $3.55 billion last quarter—about triple what analysts had expected—as rising foreclosures pushed up its credit losses by as much as 50 percent. Fannie's CEO called the sinking house market the "toughest...in a generation" and predicted further declines.

On the bright side, however, Fannie's dismal financial report actually arrived on time—for the first time in years—delighting the head of the government's Office of Federal Housing Enterprise Oversight, James Lockhart, and prompting him to lift the cap he'd imposed on the total value of mortgages Fannie and Freddie can hold at any given time. (His statement is here.)

Together with Congress's recently enacted stimulus package, which includes a provision that allows Fannie and Freddie to increase the maximum dollar amount of individual mortgages they can hold (from $417,000 to as much as $725,000), Lockhart's decision could help both companies grow their portfolios—and, potentially, their profits—in the process easing the credit crunch by giving lenders a willing buyer for the mortgages they issue.

New York Sen. Chuck Schumer, who has long been pestering Lockhart to give Fannie and Freddie the leeway to step in, described the decision as "long overdue" and called on Lockhart to go even further by easing capital surcharge requirements "that continue to hamstring the companies."

To be sure, for every dollar in mortgages each adds to its books, it has to add 30 cents to the cash reserves it keeps, an expensive, if prudent way to ensure it doesn't go bankrupt if foreclosures continue to skyrocket and it has to shell out money to cover the bad loans.

Thing is, however, Fannie and Freddie are backed by the government. Together they hold or guarantee trillions of dollars in mortgages, and there's simply no way in heck that the feds will let either go out of business. Indeed, if Fannie and Freddie are, as the government originally intended, a way to give more Americans access to the American Dream of home ownership, it makes sense to give them all the flexibility possible to do just that.

That is, of course, as long as they do what the rest of us must and file their tax statements on time.