To further compound the economic woes we have been facing in this country, they are being exacerbated by the stock prices of Fannie Mae and Freddie Mac taking a devastating tumble into the abyss. 

The mortgage giants, created by the Federal government to finance the country's home owners, carry much clout in the credit market.  Large pockets of mortgage loans are bought up by Fannie and Freddie from lending institutions like banks.  In buying this type of debt, both place a guarantee that the loans will be repaid.  Because the debt is guaranteed, it is a safe bet to attach  an investment to the future payment, which can be risking.

No one expected the housing market to take a tumble, but its drop hurt Freddie and Fannie.  It has limited their ability to secure and back home mortgages.  The catalyst that struck was a memo from Lehman Brothers, a prominent investment house, stating that the two mortgage companies would need big infusions of capital due to potential changes in accounting rules.

From our perspective, the raising of capital is not the solution or the primary step to alleviate their troubles.  This sort of action should play a role further down in the rehabilitation of the market and mortgage sector.

Gaining capital can best be used as a cushion against greater losses, as is anticipated in the future.  This, however, will prove to be difficult as investors will turn a wary eye at an investment in two failing companies, despite the 60% drop in stock price.

Further down the line, lending institutions can be severely impacted by the loss of backing from Fannie and Freddie, which are the primary sources of funding in many cases.

This loss of funding and backing would then deteriorate the pool of available funds for home buyers, or shorten the available cash in the market.  The price of homes will then drop at an accelerated rate, breaking records already set earlier in the year, resulting in a even bigger hurdle to economic recovery.

Bruce Harting of Lehman Brothers did, however, downplay the probability of Freddie and Fannie's need to raise capital, but the memo still indicated the impending write-off of up to $4 trillion in losses as the economy shrinks. 

It is popular opinion in the financial community that a failure in either one of these institutions would trigger widespread turmoil in the credit markets, such that would make the recent dips seem insignificant in comparison.  Subsequently, the global markets would feel of ripples of such turmoil en masse.

With such close ties to the government and their structural support of the economy, any signs of default by these companies would surely trigger a bailout from the Federal government, as was the case with Bear Sterns.  This assured stance will keep a crisis of confidence at bay.

Current capitalization of Freddie and Fannie will ease their ability to raise capital in the future.  Otherwise, the subprime market meltdown will seem like nothing should Freddie and Fannie become unable to be financially secure.

Many analysts, unfortunately, express pessimism in the future of prime mortgage loans, which makes up a large portion of Freddie and Fannie's business, and foresee a continued slide in defaults.  This scenario then presents a government bailout a realistic end to a potentially catastrophic event. 

The primary source of business is in danger from the growing number of default loans.  Such funds as Fusion have profited from the sharp decline in stock price of Fannie Mae because they have taken an aggressive position on Fannie Mae despite the outlook.

It begs the question, "If we knew how dramatic the effects could be, why didn't anyone do anything about it?"