It's pretty clear that some investors don't have much faith in either Fannie Mae (FNM) or Freddie Mac (FRE); shares in Freddie were off nearly 25 percent, and Fannie by nearly 20 percent, when this story was published Wednesday afternoon, as concern over the two mortgage finance giants' future raged onward. The historic lows and renewed selling activity comes amid speculation that the Treasury will use its new-found authority to inject capital into the GSEs -- but whether that speculation is warranted or not has been a heated topic of debate.

Richmond Fed bank president Jeffrey Lacker became the first Fed official to come out publicly and say that the GSEs needed to be "credibly and demonstrably" nationalized, in an interview on Bloomberg television Tuesday afternoon.

"And I think a path like what Chairman Greenspan suggested is probably the best path,'' he said, according to a report on Bloomberg's website. Former Fed chief Alan Greenspan has suggested nationalizing Fannie and Freddie, and then splitting them up into five seperate companies and selling them back into the private market.

Despite widespread media coverage, some sources have suggested that such a plan would be "disingenuous," saying that any move by the government to nationalize the GSEs would remove any private investor impetus for a future sale.

"How neurotic would investors need to be to buy into something like that?" said one source, a senior bank executive that asked not to be named. "The government wipes you out completely, and then asks for more of your money later on in a smaller company? What, so they can wipe you out again, next time around?"

Henry Cisneros, former Housing and Urban Development secretary under President Bill Clinton, took a different tack in a Fox Business interview Tuesday, suggesting that there was little chance either GSE would need an injection of federal capital, despite the recent market turmoil.

"These entities have been absolutely essential to the long-term, 50-year growth of home ownership in the U.S.," he said. "If they didn't exist, we'd have to invent them."

Debt versus equity

While equity prices in both GSEs have just been obliterated this week, HW's sources suggested that share price declines mattered little to the core operations of either Fannie or Freddie; one source characterized stock prices in either company as "mostly symbolic."

"The debt markets are where the GSEs live, and on that front, it's not as bad as the financial press is making things seem," said the bank executive that spoke with us.

In particular, a $3 billion auction of short-term debt by Freddie Mac yesterday has drawn attention for its pricing; the five-year notes were priced to yield 4.172 percent, or 113 basis points above Treasuries, the highest such spread Freddie has ever paid on such debt.

A story in the Wall Street Journal suggested Wednesday that the increasing borrowing costs at Freddie were evidence of its shaky footing with investors, but an ABS analyst that spoke with HW suggested otherwise.

"The offering was oversubscribed, for one thing, and the cost of any new capital for anyone in this market is elevated, whether via debt or equity," said the source. "JP Morgan saw similar elevation on a recent debt issue as well, and nobody began talking about the company's future."

Which means that any rise in borrowing costs at Freddie or Fannie shouldn't be interpreted in a vacuum, even with the implicit-explicit government backing both now receive; the ABS source we spoke said that the elevated spread, if anything, reflected investors' belief that neither company would actually soon be nationalized.

"The debt was priced as if Freddie were a private company, operating in a tough credit environment," she said.

Bloomberg News suggested Wednesday, however, that international demand for Fannie and Freddie debt has been on the wane as of late; and that lack of demand may have the potential to become more troubling in the weeks ahead, even if investor hesitance has little to do with actually being repaid on their investments. Investors overseas are a critical component of the debt market used to fund much of each GSE's core operations; and thus far, overseas investors have remained steadfast in their interest for both Fannie and Freddie's debt.

Fannie paid a record high yield in a $3.5 billion sale of three-year benchmark notes last week that drew less demand from Asia, although investors from the region still bought 22 percent of the offering, Bloomberg reported. That's roughly half the demand of three months ago.

"The 22 percent of Asian participation is worrying," Ajay Rajadhyaksha, the head of fixed-income strategy for Barclays Capital in New York, told Bloomberg. Both GSEs have more than $220 billion in debt to roll over before the end of the current quarter.

Yet, if the GSEs or the Treasury are concerned, they certainly aren't showing it yet.

Freddie Mac said it "continues to have strong access to the debt markets at attractive spreads,'' according to spokeswoman Sharon McHale said. Fannie's press representatives have not commented on the matter.

"Treasury is monitoring market developments vigilantly. We are focused on encouraging market stability, mortgage availability, and protecting the taxpayers' interests,'' Treasury spokeswoman Jennifer Zuccarelli said.

In other words: stay tuned.