Capital Fears Sink Fannie, Freddie (Update2)

Updated from 10:57 a.m. EDT.

Shares of Fannie Mae(FNM) and Freddie Mac(FRE) plummeted anew on Thursday, after a former Federal Reserve official labeled them "insolvent" and top government officials increased their fretting about the government-sponsored mortgage giants.

The two stocks have been hammered this week, as concerns about their liquidity position in the face of rising foreclosures have mounted. Foreclosure filings in the U.S. grew by more than 50% in June vs. a year ago, according to RealtyTrac. Fannie shares have lost 30% since the July 3 close, while Freddie's shares have plummeted 45%.

Ex-St. Louis Fed President William Poole did not help matters in an interview published by Bloomberg on Thursday, in which he said the government may need to bail out the two companies.

"Congress ought to recognize that these firms are insolvent, that it is allowing these firms to continue to exist as bastions of privilege, financed by the taxpayer," Poole told the wire service.

Meanwhile, The Wall Street Journal reported on Thursday that the Bush administration had intensified talks about what the government could -- or should -- do if the companies become unable to raise more money or continue doing business. The government, however, does not expect Fannie and Freddie to fail, the paper said.

In testimony to the House Financial Services Committee, Treasury Secretary Henry Paulson sought to settle nerves about the two companies, pointing out that James Lockhart, director of their main regulator, the Office for Federal Housing Enterprise Oversight, earlier this week said they were adequately capitalized.