Cloud hangs over U.S. mortgage firms

By Lynn Adler

NEW YORK (Reuters) - Buyers showed no hesitation in bidding on Freddie Mac's $3 billion (1.5 billion pound) debt sale on Monday, just hours after the U.S. government pledged support for the nation's top mortgage finance agencies, but the steps failed to stem growing alarm on Wall Street.

Global stock markets had rallied after the Treasury Department and Federal Reserve stepped in on Sunday with offers of richer credit lines, equity purchases and direct access to central bank coffers should Freddie and its sister agency Fannie Mae run into deeper financial trouble.

However, stocks quickly shed initial gains as investors feared the steps will do little stem the losses spreading through the financial sector in the wake of a deflating housing market and stalling economy.

Friday's failure of mortgage lender IndyMac Bancorp Inc, the third-largest bank collapse in U.S. history, was a pointed and painful reminder of the financial strains. Shares of a host of banks, including National City and Washington Mutual, fell sharply.

"This incident (with Fannie and Freddie) is not the last one," billionaire investor George Soros told Reuters in a telephone interview, adding that the year-long global market turmoil represented "the most serious financial crisis of our lifetime."

Fannie and Freddie together finance about half of U.S. homes and are seen as vital for stabilizing the worst housing slump since the Great Depression some 80 years ago. But as mortgage defaults rise, even among borrowers with seemingly solid credit, concerns have grown that the two agencies may need more money to cover heavier losses.

Their shares ended lower in a volatile trading day despite the vote of investor confidence exhibited in the debt auction.

"Ultimately, we do not view these (government) measures, dramatic as they look, as either a turning point for the U.S. housing market or as a sign that the downturn will be much worse than previously believed," Goldman Sachs economist Jan Hatzius wrote in a note to clients.