July 8 (Bloomberg) -- Fannie Mae and Freddie Mac triggered a surge in the cost of protecting company debt from default to the highest in 14 weeks on concern the two largest U.S. mortgage finance companies may need to raise $75 billion.

Credit-default swaps on the Markit iTraxx Crossover index of 50 companies with mostly high-risk, high-yield debt ratings increased 23 basis points to 560, the highest since March 31, according to JPMorgan Chase & Co. at 12:05 p.m. in London. In Tokyo the Markit iTraxx Japan index climbed 2 to 150, Morgan Stanley prices show.

Record delinquencies on home loans already helped cause financial companies worldwide to write down more than $400 billion on debt holdings and prompted Fannie Mae and Freddie Mac to raise almost $20 billion in new capital. They may need as much as $75 billion more as new accounting rules require them to bring off-balance sheet mortgages on to their books, according to Lehman Brothers Holdings Inc. analysts led by Bruce Harting.

``Fannie and Freddie spooked everything,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``At this stage in the cycle, it is very difficult to raise capital.''

Fannie Mae shares, which dropped $3.04, or 16.2 percent, yesterday in New York to $15.95, rose 21 cents at 11:13 a.m. in Frankfurt. Freddie Mac, which fell as much as 29 percent to a 16-year low yesterday, climbed 14 cents to $12.05 in Frankfurt trading.

Home Repossessions

Washington-based Fannie Mae and Freddie Mac in Mclean, Virginia, have declined more than 60 percent this year as the housing slump shows no sign of abating. U.S. pending home resales probably fell 3 percent in May, after increasing 6.3 percent in the previous month, according to the median forecast of 36 economists surveyed by Bloomberg News. That would be the biggest decline since November. The National Association of Realtors is scheduled to release its report at 10 a.m. in Washington.

Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to Realty Trac Inc., a real estate database in Irvine, California. Home prices in 20 U.S. metropolitan areas fell 15.3 percent in April by the most on record, the S&P/Case-Shiller home-price index shows.

``Trying to raise $75 billion in the current environment would be very difficult,'' said Mark McCarthy, a credit trader at ABN Amro Holding NV in Sydney. ``I don't think investors are going to be as forthcoming about stumping up the cash that we've seen in the past.''

Debt Speculation

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.

Contracts on the Markit iTraxx Europe index of 125 companies with investment-grade ratings jumped 5.75 basis points to 110.75, JPMorgan prices show. The Markit iTraxx Financial index rose 5.5 basis points to 99.

A basis point on a credit-default swap contract protecting 10 million euros ($15.7 million) of debt from default for five years is equivalent to 1,000 euros a year.

The CDX North America Investment Grade Index closed 1 basis point higher at 148 in New York, according to Lehman Brothers.

To contact the reporters on this story: Abigail Moses in London Amoses5@bloomberg.net

Last Updated: July 8, 2008 07:09 EDT