Trouble with U.S. mortgage giants spreads

WASHINGTON, Aug. 19 (UPI) -- Fears over two U.S. mortgage giants collapsing are rippling through financial systems and putting a strain on the system, analysts said.

A report in Barron's suggesting the government would move on re-capitalizing the Federal Home Loan Mortgage Corp. and the Federal National Mortgage Association, sent shares of the two government-sponsored enterprises down 25 percent and 22 percent, respectively, on Monday, the Financial Times reported.

A Treasury Department spokesman called the Barron's report "speculative," the Times reported.

But, the drop pressured share values of financial concerns that do business with Freddie Mac and Fannie Mae, helping push the Standard & Poor's 500 index down 1.5 percent Monday.

Fannie Mae and Freddie Mac's debt also dropped in price, which, in turn, threatens interest rates on mortgage loans, the Times said.

"There is still stress in the system," George Goncalves at Morgan Stanley said.

That stress was also reflected in the price of insurance against default for Fannie Mae and Freddie Mac debt, which hit record levels in the credit default swaps market, the Times reported.

Fears have also spread to money markets.

"A year's worth of tightening credit is only now being felt," said Tobias Levkovich, chief US equity strategist at Citigroup.