The financial markets weighed in Monday on the government’s historic takeover of Fannie Mae and Freddie Mac -- and the verdict was a rousing thumbs up.
Yields on mortgage-backed bonds tumbled, opening the door to sharply lower mortgage rates. That fueled a powerful stock rally, led by the beaten-down shares of home builders and financial companies, as investors concluded the federal intervention could alleviate the credit crunch and housing downturn and benefit the overall economy. The Dow Jones industrials surged almost 300 points.
But shares of Fannie Mae and Freddie Mac themselves plunged -- officially becoming penny stocks -- because the government takeover is expected to severely diminish their value. Fannie plummeted $6.31, or 90%, to 73 cents, while Freddie sank $4.22, or 83%, to 88 cents.
A day after the Treasury Department said it would stand behind the obligations of the twin housing giants, yields on mortgage bonds guaranteed by them tumbled, driving down the firms’ borrowing costs, as investors jumped in to buy the bonds in the open market.
The annualized yield on the benchmark Fannie Mae 30-year mortgage-backed bond sank to a five-month low of 5.21% from 5.63% on Friday. A similar security issued by Freddie Mac fell to 5.39% from 5.74%.
The lower yields began to show up in mortgage rates Monday as the average rate on a 30-year fixed-rate conventional mortgage loan dropped to 6.04% from 6.34% on Friday, according to research firm HSH Associates.
A sustained drop in mortgage rates below 6% could bring more buyers into the glutted housing market, while also giving an assist to strapped homeowners who are trying to refinance.
“That should provide some kick-start but [rates] do have to get down there and hang around there a little bit,” said Keith Gumbinger, vice president at HSH. “It takes time to build a water-cooler buzz.”
But mortgage-bond yields and home-loan rates have fallen on turnaround hopes at other points in the housing crisis -- such as when the Federal Reserve engineered the rescue of Bear Stearns Cos. last March, but those declines soon reversed.
“After a week or two those moves didn’t hold,” said James Bianco, president of Bianco Research in Chicago.
But those false hopes didn’t seem to bother investors Monday as the stock market shot out of the opening gate, with the Dow bounding almost 350 points in the first minutes.
The blue-chip indicator finished up 289.78 points, or 2.6%, to 11,510.74.
The Standard & Poor’s 500 index climbed 25.48 points, or 2.1% to 1,267.79, while the Nasdaq composite index lagged behind, rising 13.88 points, or 0.6%, to 2,269.76.
Advancing issues outnumbered decliners by about 2 to 1 on the New York Stock Exchange.
An index of 15 home builders in the S&P; 500 soared 10% on the prospect for lower mortgage rates. Los Angeles-based KB Home shot up $2.93, or 14%, to $23.54. D.R. Horton jumped $1.56, or 12%, to $14.14. Lennar rose $1.39, or 10%, to $14.95
An S&P; financial stock index gained 4.7%, while the KBW bank-stock index surged 6.9%. Bank of America leaped 7.8%. Wachovia rose $2.24, or 13%, to $18.99. Citigroup rose $1.25, or 6.6%, to $20.32.
But investment bank Lehman Bros. Holdings sank $2.05, or 13%, to $14.15 on signs that regulators in South Korea would frown upon an acquisition of a large stake in Lehman by a bank based there.
And shares of Philadelphia-based regional banking firm Sovereign Bancorp, which is believed to have held a large investment in the preferred shares of Fannie Mae and Freddie Mac, skidded 64 cents, or 6.6%, to $9.02.
In the technology sector, SanDisk fell $1.04, or 5.9%, to $16.60, while Apple fell $2.26, or 1.4%, to $157.92, on worries that slowing economies overseas will damp demand.
Wall Street’s broad advance Monday built on a strong overnight rally in foreign markets that followed the Treasury’s move Sunday to place the housing-finance giants into conservatorship. Most markets across Europe and Asia gained 3% to 4%.
“Like anything else, you’re going to have immediate euphoria, then a reassessment and then time will tell,” said Robert W. Bissell, president of Wells Capital Management in Los Angeles. “But still this was a good step.”
(BEGIN TEXT OF INFOBOX)
Performance on Monday of the 10 main industry groups in the Standard & Poor’s 500 stock index.
Financial services: +4.7
Consumer discretionary*: +4.1
S&P; 500: +2.1
Consumer staples**: +2.1
*Includes automakers, home builders, retailers and restaurant chains.
**Includes food makers, household product firms and grocery chains.
Paul Duginski Los Angeles Times
Severance: The CEOs
of Fannie and Freddie are expected to take away millions. Page C5