NEW YORK — Stocks rallied Monday as investors placed bets that a recovery in the financial and housing sectors is more likely to occur following the U.S. government’s move to bail out mortgage giants Fannie Mae and Freddie Mac. The Dow Jones industrials gained nearly 300 points.
The announcement Sunday that the Treasury Department was seizing control of the companies, which own or back about half the nation’s mortgage debt, brushed aside investors’ long-simmering worries that the pair would be felled by a spike in bad mortgage debt.
Investors were hoping that the plan to inject up to $100 billion in each of the government-chartered mortgage financiers could not only help lower mortgage rates but perhaps help buoy the overall economy. The move could help banks feel more open to write new mortgages and to refinance existing mortgages at lower rates, offering a possible lifeline to consumers struggling with increasing payments.
The move appeared to have an immediate soothing effect on mortgage rates. The national average interest rate for a 30-year fixed-rate mortgage dropped 0.3 percentage points to 6.04 on Monday, according to financial publisher HSH Associates.
But the government’s steadying hand for two institutions that many Wall Street observers had said were simply too big to let fail isn’t likely to alleviate troubles for homeowners who have fallen far behind on their mortgages.
Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams in New York, said that while the plan boosts confidence in sectors such as financials and homebuilders, it doesn’t immediately alleviate worries about other areas of the economy.
At the close, the Dow Jones industrial average rose 289.78, or 2.58 percent, to 11,510.74 after being up nearly 350 points in the early going.
Broader stock indicators were also higher. The Standard & Poor’s 500 index advanced 25.48, or 2.05 percent, to 1,267.79, and the Nasdaq composite index added 13.88, or 0.62 percent, to 2,269.76.
Common shares of Fannie Mae and Freddie Mac will be made virtually worthless by the plan, which will dilute the stock. But the companies’ shares had already suffered huge declines in the past year, so many shareholders already had endured the majority of their losses.
Fannie Mae’s shares plummeted $6.34, or 90.1 percent, to 73 cents, while Freddie Mac’s fell $4.21, or 83 percent, to 88 cents.
“This was another needed piece of the puzzle with regard to eliminating fear and stress in the market,” said Jim Dunigan, chief investment officer for PNC Wealth Management in Philadelphia, referring to the government’s move. “It helps with the balance-sheet questions that are out there for financials, without a doubt.”
Still, Dunigan remains cautious.
“This isn’t a magic wand. We’re probably going to see another couple bank failures,” he said.
