Looking to quell investor fear over the solvency of both Fannie Mae (FNM) and Freddie Mac (FRE), Treasury chief Henry Paulson said Friday morning that no bail out was in the works, contrary to press reports Friday that had suggested that adminstration officials were considering conservatorship for one or both GSEs. "Today our primary focus is supporting Fannie Mae and Freddie Mac in their current form as they carry out their important mission," Paulson said in a statement. "OFHEO will continue to work with the companies as they take the steps necessary to allow them to continue to perform their important public mission." In other words: everyone, just chill out. On the heels of Paulson's remarks, prices on Fannie Mae’s current-coupon, 30-year fixed-rate mortgage bonds dropped back in from the stratosphere -- almost immediately. As of 12:27pm, the agency bonds were at $101.19, actually 3 basis points below yesterday's close; earlier in the day, prices had swung 34 basis points in the opposite direction as MBS participants began pricing in an apparent explicit government guarantee, sending prices for agency MBS up dramatically. Higher MBS prices translate into lower yields, and generally into more favorable mortgage rates for borrowers; which means that more than a few lenders have been sent scrambling this afternoon by Paulson's remarks to re-price their mortgages, and contributing to what will likely be one of the more volatile days for mortgages since March. While MBS investors were reeled in by Paulson's remarks, equity investors were clearly unconvinced: share prices in both Fannie and Freddie remained off nearly 30 percent when this story was published, but had clawed back somewhat from the 40 percent drops recorded earlier in the day. Emerging thoughts that selling 'overdone' Analysts and the financial press began picking up on the meme that perhaps both GSEs were subjects of overly-aggressive selling. Bloomberg News reported Friday afternoon, citing analysis from Fox-Pitt analyst Howard Shapiro, that both Fannie and Freddie would need to lose $77 billion "almost immediately" in order to be at any real risk of insolvency. The Bloomberg story underscores what market participants had told HW privately for most of this week; that any suggestions the GSEs were insolvent was "ludicrous," according to one banking executive we spoke with. Conservatorship would be an issue only if the GSEs fell below defined critical capital levels, and neither is close to such a danger zone: taken together, Fannie and Freddie's current capitalization is $50 billion above such a level. Freddie is also planning to raise an additional $5.5 billion in fresh capital later this year. That's not to say that either firm is without its problems; growing risk from exposure to mortgage insurers, as well as rising credit costs as more and more loans go bad, certainly are a reason to be concerned about whether Fannie or Freddie can (or should) really play the role of housing market backstop for Congressional efforts to prop up ailing housing markets across the nation. HW was among the only media outlets suggesting earlier this week that the panic over both Fannie Mae and Freddie Mac was likely being overdone -- see earlier coverage here -- and Friday, analysts at Citigroup Inc. (C) jumped onto the bandwagon, suggesting that shares of the battered housing giants have been oversold on investor fear. "We believe that no one in Washington desires for a nationalization of the GSEs, which would bring the burden of providing mortgage access and liquidity on to the shoulders of taxpayers," said Citigroup Global Markets analysts Bradley Ball and Arren Cyganovich in a research note. "We believe the market needs to be reminded that the GSEs were structured as shareholder-owned institutions for a reason -- to provide non-federal capital support for the U.S. housing and mortgage markets, and that the GSE structure has worked in the past (such as during 1998) and continues to work today." But for every analyst willing to float the idea that Fannie and Freddie are going to be just fine, ten are willing to suggest otherwise -- and with the share prices holding a steady freefall seemingly all week, such an assessment shouldn't be surprising. Jon Najarian at options research firm OptionMonster Inc. suggested in a research note that shares in Fannie Mae and Freddie Mac were "worthless," according to a MarketWatch report. He said that both GSEs' "equity may be toast." Time will tell on this, but one thing is amply clear: the nation's housing woes are far from over. Disclosure: The author was long FRE and held no other positions of relevance when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.