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Fannie Mae and Freddie Mac plunge

Shares of the two mortgage financing giants each hit a new 52-week-low after a Lehman Brothers report raised concerns about the need for more capital.

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By Catherine Clifford, CNNMoney.com staff writer

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Shares of Fannie Mae and Freddie Mac plummeted Monday after a Lehman Brothers report raised fears the two would need to raise more capital.
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NEW YORK (CNNMoney.com) -- Shares of mortgage financing giants Fannie Mae and Freddie Mac both plummeted Monday after an analyst with Lehman Brothers wrote in a report that the two companies may need to raise billions of dollars if accounting rules are changed.

Shares of Fannie Mae (FNM, Fortune 500) fell more than 16% to $15.74. The stock set a new 52-week low of $14.65 earlier during the day. Freddie Mac (FRE, Fortune 500) plunged nearly 18% to $11.91. It also hit a new 52-week low of $10.28 a share before recovering slightly at the end of the trading session.

Fannie Mae and Freddie Mac are government sponsored enterprises that help the mortgage market function by purchasing pools of loans and packaging them into securities.

According to a report from Lehman Brothers analyst Bruce Harting, the Financial Accounting Standards Board (FASB) is considering a rule change that would force Fannie and Freddie to move so-called off balance sheet securities onto their balance sheets.

The potential accounting change would require Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion of capital, Harting noted.

Fannie Mae was not immediately available for comment about the Lehman report. Sharon McHale, spokesperson for Freddie Mac, said that Freddie Mac will "not comment on changes in the stock price."

But an accounting rule change would be the latest blow to Fannie and Freddie. With more than a million Americans facing foreclosure and home prices sinking, the two companies have already been hit hard.

The two companies, which bought securities backed by risky subprime mortgages when the housing market was booming, have watched those bets unravel in the past few months as the housing market buckled under credit crisis pressures.

Fannie Mae has reported a loss for the past two quarters while Freddie Mac has posted three consecutive quarterly losses. Both companies are expected to report a loss in the second quarter as well.

As such, concerns have grown about their need for more capital. Some analysts have even suggested that a government bailout of the two may be necessary.

But one analyst said the accounting changes discussed in the Lehman report were so drastic, that it's hard to imagine Fannie and Freddie being forced to adopt them.

"The notion that FASB would be so reckless to precipitate a major financial crisis just seems too absurd to believe," said Jaret Seiberg, a financial services policy analyst at Stanford Group, a research firm.

In fact, even Lehman's Harting downplayed the notion that Fannie Mae and Freddie Mac would soon need to raise more capital.

Harting wrote that it would be "extremely challenging" for either company to come up with so much cash to meet new minimum capital requirements, causing already timid investors to be concerned. He added that a "severely undercapitalized" Fannie and Freddie "could possibly topple the already fragile markets."

For this reason, Harting went on to write that he thought it was "highly unlikely" that the FASB would impose such new regulations on Fannie and Freddie.

Nonetheless, the thought that Fannie and Freddie may need to raise more capital further spooked Wall Street, which prior to the Lehman report already had plenty of reasons to be worried about Fannie and Freddie as well as other financial stocks.

"The stocks continue to drift down on any news, whether it is reality or not," said Frederick Cannon, managing director at KBW, an investment bank that specializes in financial firms. Cannon says that any change in the capital requirements for GSE's would not come from a change in accounting rules, but from careful consideration and gradual change in Congressional regulation.

There is so much anxiety surrounding the housing market, said Seiberg, that "everyone is on edge." To that end, shares of other top bank and brokerage companies fell in afternoon trading Monday.

Dow components Bank of America (BAC, Fortune 500) fell nearly 4% while Citigroup (C, Fortune 500) was down 2.5%. Wachovia's (WB, Fortune 500) stock fell 7%. And shares of the investment bank Lehman Brothers (LEH, Fortune 500), which is facing its own concerns about the need for more capital, plunged 9%. To top of page

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