The nation’s second biggest mortgage holder had Wall Street in a tizzy on Tuesday when it was announced that they were showing a big loss.  This put both investors and prospective home owners in a tail spin.

Troubles At Freddie Mac

Freddie Mac owns or guarantees more than 40% of the country’s residential mortgages.  The guarantee is backed by the federal government.  Freddie Mac has shown a loss of $2bn, and this is putting many investment companies in a quandary.  Countrywide financial is especially hard hit.

Freddie Mac has been targeted by congressional Democrats as being the source for a proposal that would increase the cap of $417,000 that is now in place.  This is especially important in California, where home prices are typically very high.  This may now be in jeopardy due to rising losses in the loan portfolios held by Freddie Mac and its sister company, Fannie Mae.

On Wall Street

This crisis has driven the price of Freddie Mac down 29%. Tuesday showed the biggest one-day drop since the stock began trading in 1988. The feeling on Wall Street seems to be that a company that cannot cover its current portfolio shouldn’t be gambled on with new responsibilities.

What’s Happening At Countrywide

Countrywide has already taken a beating in the mortgage market with its habit of making risky loans.  Now, they have strategized making future loans that they could sell to Freddie Mac and Fannie Mae.  Because of the report on Tuesday, shares of Countrywide also took a beating.  Freddie Mac warned Tuesday that it might have to limit its role in the mortgage market if it can’t shore up its finances.  This effectively kills Countrywide’s strategy.

What Will Happen

The consensus is that the foreclosure crisis has officially spilled over into the prime market.  People in the forefront are expecting the Bush administration to help bail out this mess, using whatever tools they have at hand.  The White House, however, is focusing on HopeNow and working with the FHA to help ease the issues of foreclosure.  Where will this leave Freddie Mac?