Actual finance blog

The Senate on Saturday overwhelmingly passed a landmark housing bill that will offer up to $300 billion in loans for troubled homeowners and establish a government rescue plan for mortgage finance giants Fannie Mae and Freddie Mac.

The House passed the bill on Wednesday just hours after President Bush reversed his long-standing vow to veto the bill. Bush is expected to sign it soon.

The legislation, one of the most far-reaching on housing in decades, marks the centerpiece of Washington’s efforts to address the nation’s housing meltdown.

"This legislation won’t perform miracles. But as others have said, it’s a step - and I hope an important step - to putting our nation on the road to economic recovery," said Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee and a principal author of the bill.

Following the vote, Dodd said he will meet on Tuesday with representatives from the Treasury, the Federal Reserve, the FDIC and the Department of Housing and Urban Development to discuss how the legislation can be implemented as quickly as possible. "I’m not going to tolerate a slow walk," he said.

Though the Senate vote was 72 to 13, the bill was not without its staunch opponents.

Sen. Charles Grassley, R-Iowa, the leading Republican taxwriter, had supported earlier versions of the legislation but objected to the rescue plan for Fannie and Freddie. "This bill has fallen prey to the special interests on Wall Street and K Street at an unjustifiable expense to taxpayers and homeowners on Main Street," Grassley said.

The White House also objected to parts of the bill, including aid to states to buy foreclosed properties. But White House Press Secretary Tony Fratto said the measures concerning Fannie and Freddie are "urgently needed now … President Bush will sign this bill when he receives it, despite our concerns with some provisions."

The bill has two principal objectives: to offer affordable government-backed mortgages to homeowners at risk of foreclosure, and to bolster Fannie and Freddie with a temporary rescue plan and a new, more stringent regulator.

Provisions in the 700-page bill that would most directly affect consumers and communities include:

Increase the Federal Housing Administration’s role. The FHA will be allowed to insure up to $300 billion in new 30-year fixed-rate mortgages for at-risk borrowers in owner-occupied homes if their lenders agree to write down loan balances to 90% of the homes’ current appraised value.

The cost of the new FHA program - which would begin on Oct. 1 and be in place for just a few years - would be funded by fees from Fannie and Freddie, along with fees paid by both lenders and borrowers.

While the bill authorizes the FHA to insure up to $300 billion in loans, the CBO estimates that the agency is only likely to insure up to $68 billion and help keep roughly 325,000 people in their homes. Those estimates were based on the CBO’s assessment of who is likely to qualify under the program and accounts for a certain number likely to default anyway.

(Here are more details on this provision.)

Establish a stronger regulator for the GSEs. The new regulator will have a greater say over how well funded the two government sponsered enterprises (GSEs) are - a major concern in the markets that has sent stocks in both companies plunging.

Permanently increase "conforming loan" limits pay day loans. The bill would permanently increase the cap on the size of mortgages guaranteed by Fannie and Freddie to a maximum of $625,500 from $417,000.

The FHA maximum loan limits for high-cost areas would also increase to $625,500. Higher loan limits will make it easier for borrowers to get mortgages, because they’re more likely to be traded if they are considered conforming.

Create home-buyer credit. The bill includes a tax refund for first-time home buyers worth up to 10% of a home’s purchase price but no more than $7,500.

The refund, however, serves more as an interest-free loan, since it would have to be paid back over 15 years in equal installments.

Bar down-payment assistance for FHA loans. The bill eliminates a program that has allowed sellers to provide down payment assistance.

The bill would also increase to 3.5% from 3% the down payment requirement for borrowers getting FHA loans.

Create an affordable housing trust fund. The bill establishes a permanent fund to promote affordable housing. The fund would be paid for by fees from Fannie and Freddie.

Give grants to states to buy foreclosed properties. The bill would grant $4 billion to states to buy up and rehabilitate foreclosed properties. The funding had been opposed by the White House, which said it would benefit lenders and not homeowners.

Concerns over whether Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) will have enough money to weather future losses in the housing market sent shares plummeting in recent weeks. Since the beginning of June, Fannie’s stock price has dropped 57% and Freddie’s plummeted 66%. For the past year, they’re both down roughly 85% as of the end of trade on Friday.

Fannie and Freddie guarantee the purchase and trade of mortgages and own or back $5.2 trillion in mortgages.

To help stabilize markets, Treasury Secretary Henry Paulson asked Congress to temporarily empower Treasury to offer the companies a backstop if needed. Consequently the housing bill now includes provisions that let Treasury over the next 18 months offer Fannie and Freddie an unlimited line of credit and the authority to buy stock in the companies.

Both critics and supporters of the Paulson plan have expressed concern that loaning or investing money in the companies could leave taxpayers with a fat bill to pay.

The Congressional Budget Office on Tuesday estimated the potential cost of a rescue could be $25 billion. CBO said there is probably a better than 50% chance that Treasury would not need to step in. It also said there is a 5% chance that Freddie’s and Fannie’s losses could cost the government $100 billion. 

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South Korea's economy expanded at the same pace in the second quarter as the first as export gains made up for cooling consumer spending.

The economy grew 0.8 percent from the previous quarter, the central bank said in Seoul today. From a year earlier, gross domestic product increased 4.8 percent, after a 5.8 percent gain in the first quarter.

Exports, which make up about half of the economy, may cool as the U.S. slowdown spreads to the emerging markets that have been buying South Korea's electronics and ships. At home, soaring fuel costs and a weaker won are driving the fastest inflation in almost 10 years, squeezing household incomes and company profits.

“The key uncertainty lying in front of the Korean economy is how sustainable will global demand be,'' said Oh Suk Tae, a Seoul-based economist at Citibank Korea Inc. “Third-quarter economic growth, especially private consumption, will be affected by rising oil prices.''

Both measures matched the median estimates of economists surveyed by Bloomberg News. On July 2 the government trimmed its 2008 growth forecast to 4.7 percent from 6 percent. The economy grew 5 percent last year.

South Korea's benchmark Kopsi Index of stocks fell 1.1 percent, in line with other Asian markets, after a report showed U.S. home sales fell, adding to concern the slowdown in the world's biggest economy will persist, slowing demand for Asian exports. The Kospi has dropped 15 percent this year.

Asian Growth

The won traded at 1007.40 won versus the dollar at 9:45 a.m. from 1007.10 yesterday. The currency, which fell as much as 11.5 percent this year, is now down 7.5 percent for 2008.

South Korea is among the first Asian countries to report second-quarter gross domestic product figures.

China's economy grew at the slowest pace since 2005 in the second quarter from a year earlier, and Singapore's expanded at the slowest pace in five years by the same measure. From a year earlier, South Korea's growth was the slowest since the first quarter of 2007.

Net exports — the difference between exports and imports — powered more than half of the nation's growth, contributing 0.5 percentage point to the increase, down from 0.7 percent in the first quarter.

Spending by households, which are burdened with record debt, fell 0.1 percent, the first decline in four years payday advances. Construction investment dropped 0.6 percent. Investment in factories increased 1 percent.

Domestic Demand

Domestic demand, which includes private and corporate spending, rose 0.3 percent in the second quarter, the smallest gain in 3 1/2 years, the report showed.

Finance Minister Kang Man Soo said today the economy faces various difficulties, and that it may pick up in late 2009.

Signs of a slowdown have already been emerging. Factory output had the smallest gain in a half year in May and shipments overseas rose by the least in five months in June.

Exports may also slow as central banks across Asia raise interest rates to combat inflation, slowing economic growth and weakening demand for South Korean goods.

“Demand from emerging markets in Asia will cool because of monetary tightening in the region,'' said Shin Dong Suk, an economist at Samsung Securities Co. in Seoul.

LG Electronics Inc., Asia's second-largest mobile-phone maker, said on July 21 its revenue is poised to fall from the second quarter, when it had a record profit, as slowing global economic growth undermines demand for phones and televisions.

Emerging Markets

“There may be a contraction in emerging markets because of the economic slowdown, the spike in oil prices and inflation,'' Brian Sohn, head of investor relations at LG, said July 21.

Exporters may also come under pressure now that the government has dropped its support for a weaker won to help contain inflation. The Bank of Korea has possibly spent more than $12 billion since the end of May to boost the won's value, according to Jung Chan Ho, a currency dealer at Shinhan Bank in Seoul.

Still, exports to China and other emerging markets will help keep South Korea's $970 billion economy from cooling too much as domestic demand slows, the Bank of Korea said on July 1.

Real gross domestic income, a measure of purchasing power, rose 1.6 percent from the previous quarter, when it declined 2.1 percent.

Governor Lee Seong Tae and his policy board left borrowing costs at 5 percent this month and said economic growth may slow and inflation may stay high for a “significant period of time.''

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Washington’s plan to rescue the housing market may help shore up the U.S. economy as it copes with the worst slump in the housing market since the Great Depression, but don’t look for a swift recovery.

Investor confidence has been bolstered by the government’s recent proposals, driving stock price higher since last week, and economists agree the move to provide extra funding for mortgage giants Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz) is vital.

One unintended consequence, however, has been rising interest rates as the bond market has sold off sharply since the plan was unveiled last week. That risks muting, at least in part, the broader benefit of supporting the two mortgage finance firms.

The U.S. House of Representatives approved the housing plan on Wednesday afternoon, with the Senate expected to vote on it later.

Policy-makers and economists see the government sponsored enterprises as crucial to keeping the housing market open for business since they own or have guaranteed almost half of the $12 trillion in U.S payday advance. mortgage debt outstanding.

Financial markets’ recent loss of confidence in the GSEs led many economists to contemplate the consequences if they were to collapse, convincing many that measures being taken by Congress were necessary.

“It’s necessary and it will have positive benefits to the U.S. economy for a period while we’re in such difficult straits,” Brian Fabbri, managing director of economic research at BNP Paribas, said about the rescue package, which has also been supported by the U.S. Treasury.

“If there is no GSE Treasury help, the housing market wouldn’t just be in recession or declining, it would plunge. We wouldn’t begin to estimate how low it might go if GSEs were not able to fulfill their mission.”  

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Drug developer Merck says its second-quarter profit rose 5% as cost-cutting efforts offset a drop in sales of its asthma treatment Singulair and cholesterol drugs Zetia and Vytorin.

Whitehouse Station, N.J.-based Merck & Co (MRK, Fortune 500). says profit rose to $1.77 billion, or 82 cents per share, from $1.68 billion, or 77 cents per share, during the prior-year period. Sales fell 1% to $6.05 billion from $6.11 billion.

Excluding restructuring charges, Merck says it earned 86 cents per share faxless payday loans.

Analysts polled by Thomson Financial expected profit of 83 cents per share on revenue of $6.05 billion.

Merck shares fell 23 cents to $35.10 in after-hours trading after falling $2.35, or 6.2%, to close at $35.33. 

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Taxpayers got some good news Friday: Freddie Mac wants to take your money just as little as you want to hand it over.

The struggling mortgage giant said Friday that it plans to raise $5.5 billion by selling common and preferred stock to shore up its balance sheet - a step that could reduce fears that a government bailout is around the corner.

Freddie had previously said it would raise that money, but on Friday it finally registered its stock with the Securities & Exchange Commission, a move that allows the company to proceed. Freddie didn’t specifiy when the offer would come.

By diluting the stake of existing shareholders and saddling the company with costly preferred dividend obligations, raising capital could be costly for Freddie (FRE, Fortune 500) and its shareholders, who have seen the value of their investments drop 75% over the past year.

Raising, say, $2.75 billion by selling common stock at current prices would entail issuing more than 300 million shares - reducing current investors’ stake in the company by a third.

Freddie would presumably raise the rest of the money by selling preferred stock, but that won’t come cheap either. Freddie’s preferred dividend tab tripled from a year ago in the first quarter, to $272 million.

Despite the dilution that would come with a new stock offering, shares of Freddie surged for the third straight day in heavy trading Friday, as investors wagered that by raising new money the company would put itself in better position to weather the mortgage meltdown and resume making money when the economy rebounds.

Freddie and its larger cousin, Fannie Mae (FNM, Fortune 500), agreed to register with the SEC under a 2002 deal with legislators designed to put the two government sponsored enterprises on the same footing as other public companies when it comes to their financial reporting. Fannie registered with the SEC in 2003, but Freddie’s registration was delayed after accounting issues surfaced. Together the companies own or guarantee $5 trillion in home mortgages.

It’s been a head-spinning two weeks for Fannie and Freddie. The companies’ shares lost more than half their value last week, amid fears that falling house prices will lead to big losses on the mortgages the companies own and on the mortgage-backed securities they insure.

The selloff prompted Treasury Secretary Henry Paulson to announce Sunday that the government stood ready to buy the companies’ shares or provide them with expanded credit lines. Paulson & Co. want to ensure that Fannie and Freddie can continue to support the mortgage market amid a flight of private investors from that arena.

Paulson’s comments heightened concern that shareholders could be wiped out. Preferred stock shares that Fannie Mae issued in a May traded as low as 32 cents on the dollar Tuesday advance america cash advance. Just a month earlier they had fetched three times that.

But the companies’ common stock has bounced back over the past three days, following SEC Chairman Christopher Cox’s announcement Tuesday that the agency would tighten the rules governing short sales of big financial stocks. Since then, shares in Fannie have nearly doubled and those in Freddie have jumped 80%, though both remain far below their highs earlier this year.

Raising new money could help to ease fears that government assistance will be necessary soon. Freddie has repeatedly noted that it is adequately capitalized by the standards of its regulator, the Office of Federal Housing Enterprise Oversight, and has plenty of cash on hand. The company said Friday it expects to be in compliance with OFHEO capital guidelines when it reports second-quarter numbers next month.

Still, skeptics note that at the end of the first quarter, when Freddie was also in compliance with OFHEO targets, it had just $16 billion in shareholder equity - a measure of net worth and the company’s cushion against future losses - supporting more than $800 billion in mortgages and other assets.

The prospect of rising losses as house prices fall, together with the heavy use of leverage, has prompted critics such as hedge fund manager William Ackman - who is betting against the companies’ shares - to propose that the companies be recapitalized.

Ackman’s plan - which would certainly benefit him - would wipe out current shareholders and give holders of the firms’ senior unsecured debt control of the reconstituted companies’ equity, via an arrangement under which the bondholders would take a 10% haircut on their debt holdings and receive an equivalent amount of stock in the new companies.

Others believe Fannie and Freddie should be nationalized, wiping out shareholders and putting an explicit government guarantee behind the companies’ obligations. But Treasury Secretary Paulson has said he believes the companies should continue to be shareholder-owned.

And even if the companies eventually need government aid, there could be a case for letting them keep their stock exchange listings.

Josh Rosner, principal at Graham-Fisher in New York, says he sees a parallel in the Chrysler bailout of the early 1980s, in which the government took warrants in the automaker in exchange for providing an emergency loan guarantee. When Chrysler returned to health later in the decade, the government was able to cash in the warrants, allowing taxpayers to share in the fruits of the company’s recovery.  

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Record gas and higher food prices drove inflation to the biggest annual jump since 1991 and fanned fears about growing pressures on consumers.

The Labor Department reading on Wednesday is another sign, along with mounting job losses and declining home prices, of the economic pain suffered by Americans as prices outstrip increases in paychecks.

The latest reading came as Federal Reserve Chairman Ben Bernanke, in testimony on Capitol Hill, was warning that inflation could pose a major drag on the economy for the rest of this year.

Retail prices were up 5% annually in June, the biggest 12-month change since May 1991 - an annual figure that was skewed by the surge in gasoline prices related to the first Gulf War.

A separate Labor Department report showed the average hourly wage up only 3.4% over the same 12-month period, meaning the typical American is having trouble keeping up with the price increases.

"The government report confirms what every consumer in America has known for months now: inflation is soaring and it’s having an adverse impact on the economy," said Rich Yamarone, director of economic research at Argus Research.

On a monthly basis, the Consumer Price Index was up 1.1% in June, after a 0.6% rise in May. Economists surveyed by Briefing.com had been looking for only a 0.7% rise.

Energy prices were up 6.6% in the month, led by a 10.1% jump in gas prices. That left gasoline prices up nearly a third from a year earlier.

But there was also pain at the grocery store for many Americans, as food prices jumped 0.8% compared to May, led by a 2.8% jump in fruits and vegetables, and a 1.6% rise in dairy and related products.

The rise left grocery prices up 6.1% compared to a year ago, with cereals and bakery products posting one of the biggest year-over-year gains, up 10.4%.

Yamarone said that he believes inflation could remain at elevated levels for the next six to nine months, even if oil prices retreat from current levels.

"I wouldn’t be surprised if we creep up to 6, 7 even 8%," he said.

The so-called core CPI, which excludes volatile food and energy prices, rose 0.3%, after a 0.2% rise guaranteed cash advance loan. Economists had been looking for another 0.2% rise. The higher than expected core reading was also troubling because that could tie the Fed’s hands in its effort to help the struggling economy.

The 12-month rise in core CPI is now up 2.4%, up from a 2.3% rise in that reading in May.

Bernanke warned lawmakers on Tuesday and again on Wednesday that inflation poses a risk for the economy.

"Rapid increases in the prices of energy and other commodities … have sapped household purchasing power even as they have boosted inflation," he said in testimony.

He also warned that spending by consumer spending, which provides nearly three-quarters of the nation’s economic activity, "seems likely to be restrained over coming quarters" and that price increases could also make businesses cautious about their own spending plans.

One measure of the economic stress on households is the so-called economic misery index - calculated by adding the 12-month inflation rate and the unemployment rate. With the jump in inflation to 5% in June from 4.2% in May, the misery index is now at 10.5, the first time it has hit double digits since 1993.

While the Federal Reserve responded to economic pain earlier this year by approving deep interest rate cuts, it’s not clear the central bank will be providing any more help to help households in the foreseeable future.

The Fed generally wants to see core inflation measures up between 1% and 2%, so the new core reading was well outside the so-called comfort zone.

Bernanke said in his congressional testimony that despite the weak outlook for economic growth, the Fed could not ignore signs of rising inflation. The Fed’s strongest measure to spur economic growth, interest rate cuts, are seen as adding to inflation pressure. 

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The Federal Reserve unanimously approved new mortgage lending rules Monday in a crackdown on shady practices - particularly those involving subprime loans made to borrowers with weak credit.

The agency made several substantial revisions to the proposed regulations it unveiled in December. Many of the changes acknowledged consumer advocates’ concerns that the rules still contained too many loopholes that would allow shady lending practices to continue.

But the Fed also made some concessions to industry executives, who feared increasing oversight would lead to less lending.

The new rules will apply to all mortgage lenders, not just those supervised and examined by the Fed. All but one requirement will take effect Oct. 1, 2009. However, board members said they will continue to work on further oversight of the mortgage industry.

"The proposed final rules are intended to protect consumers from unfair or deceptive acts and practices in mortgage lending, while keeping credit available to qualified borrowers and supporting sustainable homeownership," said Fed Chairman Ben Bernanke. "Besides offering broader protection for consumers, a uniform set of rules will level the playing field for lenders and increase competition in the mortgage market, to the ultimate benefit of borrowers."

The proposals won’t help the millions of homeowners who’ve already fallen behind in their mortgages, but the Fed is aiming to prevent another such crisis by tightening lending standards, particularly for subprime mortgages.

Many critics have charged that under former Fed Chairman Alan Greenspan, there were few restraints during the real estate boom. They say the agency should have flexed its muscles several years ago, clamping down on unscrupulous lenders and protecting borrowers.

Consumer advocates said they were pleased with the changes, but stressed that the Fed’s action is just one in a series of steps needed to better protect borrowers from shady lenders. Industry executives, meanwhile, applauded the Fed for attempting to protect consumers while keeping in mind the need for low-cost mortgage loans.

The rules

The new rules governing "higher-priced," or subprime, loans will:

• Prohibit creditors from extending credit without regard to a consumer’s ability to repay the loan from income and assets other than the home’s value. The lender complies, in part, by assessing repayment ability based on the highest scheduled payment in the first seven years of the loan.
• Require creditors to verify income and assets they rely upon to determine repayment ability
• Ban any prepayment penalty if the payment can change in the initial four years. For other higher-priced loans, a prepayment penalty period cannot last for more than two years.
• Require creditors to establish escrow account for property taxes and homeowner’s insurance. This rule will be phased in during 2010.

The Fed changed the definition of higher-priced loans to first mortgages with rates at least 1.5 percentage points above the average mortgage rate published by Freddie Mac. Also, second mortgages with rates at least 3.5 percentage points above the Freddie Mac rate will fall into this category.

With this change, the Fed is hoping to address industry complaints that the previous definition would capture non-subprime loans as well.

Additional rules will apply to all mortgages, regardless of rate.

• Creditors and mortgage brokers cannot coerce a real estate appraiser to misstate a home’s value.
• Companies that service mortgage loans are prohibited from engaging in certain practices, such as pyramiding late fees no fax payday loans. Also, they must credit consumers’ loan payments as of the date of receipt and provide a payoff statement within a reasonable time of request.
• Creditors must provide a good faith estimate of the loan costs, including a schedule of payments, within three days after a consumer applies for any mortgage loan, including home improvement loans or refinancings. Currently, these estimates are only required for home-purchase loans. Consumers cannot be charged any fee until after they receive the early disclosures, except a reasonable fee for obtaining the consumer’s credit history.
• In advertisements, companies must include additional information about rates, monthly payments and loan features. The rule also bans seven deceptive practices, such as saying a rate is fixed when it can change.

In a nod to the brokerage industry, the Fed withdrew a proposal requiring additional disclosure of the "yield-spread premium," which allows banks to pay brokers for steering homeowners into higher-priced loans. After testing consumers, the agency found that the rule would likely not be effective. But the Fed said it would continue reviewing the issue.

Advocates for consumers and industry generally pleased

Both consumer advocates and industry executives put a full-court press on the Fed in recent months, trying to get the agency to revise its proposed rules. More than 4,500 comments were filed since the agency announced its plan in late December.

After reviewing the final rules, advocates said they felt the changes did provide additional protections for the consumers. In particular, it’s important that the Fed eliminated the requirement that borrowers prove lenders engaged in a "pattern or practice" of originating unaffordable loans since that’s very hard to do, said Brenda Muniz, legislative director of Acorn, a housing advocacy group.

Still, the Fed could have done better by completely banning prepayment penalties, as several states have done, said Deborah Goldstein, executive vice president of the Center for Responsible Lending, a consumer rights organization. She noted that people in subprime fixed-rate loans are still subject to hefty fees if they try to refinance their loans within two years.

Also, some advocates wondered why the rules won’t take effect for 15 months, and why subprime borrowers can opt out of escrowing their property taxes and homeowner’s insurance after the first year.

"It’s the first step toward better protecting consumers in the mortgage market, but not the last step," said Jim Carr, chief operating officer of the National Community Reinvestment Coalition, an advocacy group.

Industry executives, meanwhile, endorsed the changes overall, but said there still may be some areas of concern in the 419-page document. For instance, the Mortgage Bankers Association said it plans to ask its members about the elimination of the "pattern or practice" rule.

Still, the new rules will help consumers, without placing such a burden on lenders that they will have to curtail credit, industry insiders said.

"This is just the right amount of regulation," said Marc Savitt, president of the National Association of Mortgage Brokers. 

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Time Warner Inc’s discussions to merge or sell its AOL Internet division with Microsoft Corp or Yahoo Inc have taken on new urgency ahead of Yahoo’s Aug 1 shareholders meeting, a source familiar with the discussions told Reuters on Tuesday.

The structure of any deal is not immediately clear, though a combination of any of the parties is expected to redraw the landscape for advertising on the Internet.

Sources had said earlier that a deal with Yahoo would likely involve merging AOL with the Web pioneer, with Time Warner taking a minority stake in the combined company. A deal with Microsoft would likely be a sale of AOL, the sources said.

Time Warner and Microsoft declined comment. A representatives of Yahoo was not immediately available.

Time Warner’s talks come after Microsoft’s buyout talks with Yahoo fell apart, with Microsoft withdrawing its $47.5 billion bid in May payday loans. Since then the two have waged a public war of words.

Discussions with Time Warner have accelerated as both Yahoo and Microsoft view AOL as potentially beneficial to leverage their positions in the Internet marketplace, where Google Inc dominates.

AOL plans to split its dial-up Internet business and has focused on building a one-stop online advertising shop over the past two years.

Yahoo’s interest in AOL is designed to show shareholders that it could grow without Microsoft. 

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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 payday loan.

"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%. 

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New Zealand consumer confidence has fallen to a record low as the economy faces a recession and unemployment rises, according to a survey.

Forty nine percent of 1,119 people surveyed in the two weeks ended June 29 said it was a bad time to a major household item buy, up from 45 percent in a poll completed two weeks earlier, research group Roy Morgan said in a statement on its Web site. Thirty five percent said it was a good time to buy.

New Zealand's economy contracted in the three months ended March 31 and eight of 13 economists surveyed by Bloomberg News expect a contraction in the second quarter, putting the economy in its first recession since 1998. Record-high interest rates are crimping confidence and spending, say retailers.

“The deterioration in confidence bodes ill for retail spending,'' said Shamubeel Eaqub, economist at Goldman Sachs JBWere Ltd. in Auckland. “Current confidence levels match the lows seen in the early 1990s' recession.''

Sixty four percent of consumers expect the economy will deteriorate over the next year and 58 percent said they are financially worse off than a year earlier, Roy Morgan said. A record-high 33 percent of people expect to be worse off in a year instant payday loan.

Roy Morgan's overall confidence rating fell to 82 from 87.6 in mid-June.

Profit Outlook

Employment fell by the most in 19 years in the three months ended March 31, while the jobless rate increases to 3.6 percent from 3.4 percent. The central bank expects the jobless rate will rise to 4.6 percent by the first quarter next year.

Warehouse Group Ltd., New Zealand's biggest discount retailer, last month cut its profit forecast 10 percent, citing a slump in spending as food and fuel costs soar.

“I don't think there's a household in the country that's not under pressure financially from the burden of these higher food and petrol costs,'' Chief Executive Officer Ian Morrice said in a June 27 interview.

Reserve Bank Governor Alan Bollard said last month that slow growth means it is “likely'' he will cut the official cash rate from a record 8.25 percent this year. Twelve of 13 economists surveyed by Bloomberg News predict a rate reduction by September.

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