Not to be an alarmist, but the stocks charts of both Fannie Mae (FNM) and Freddie Mac (FRE) look to be in what I call a "death spiral", which is a stock march to either extinction or a long time-out under $5. We've seen it with other bank stocks, Indymac, National City, WAMU. In indymac's case, they went out of business. For WAMU and National City, amongst others, they're hanging on for dear life.
Now, I call it a "death spiral", but it doesn't necessarily mean that the company goes out of business; it could mean that the company bumps along the bottom for a protracted period of time recapitalizing itself. Either way, it's ugly, and either way, we need to begin to visualize the mortgage world with either a greatly reconfigured Fannie Mae and Freddie Mac, or without either of those two companies.
The key to Fannie and Freddie's survival is how long it takes for the default/foreclosure rates to bottom. Once the market gets some clarity regarding that issue, then you'll begin to see capital begin to move back into the mortgage markets.
The ARM resets peaked this summer, and they will essentially fall off the table after December 2008. From January 2009 moving forward, the credit markets should begin to see the shape of the mortgage default/foreclosure situation, in essence how deep the water is. The question for Fannie and Freddie is whether they can survive to that point recognition in the credit markets.
My guess is that in the end, Freddie Mac folds it's tent, and Fannie gets saved, but shareholder equity gets massively diluted.
