Fannie, Freddie see rise in shares
Posted on Wednesday, July 9, 2008
Freddie Mac and Fannie Mae rose the most in four months in New York trading Tuesday after the regulator for the mortgage-finance companies said they have enough capital to survive the housing market slump and meet new accounting rules.
Fannie and Freddie, the largest U. S. mortgage-finance companies, “are adequately capitalized at this point,” James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said in an interview with Bloomberg Television. “They are fulfilling their function.” Fannie Mae of Washington and McLean, Va.-based Freddie Mac, which reported combined losses of more than $ 11 billion, are stumbling just as the government is leaning on them to pull the economy out of the worst housing slump since the Great Depression. Concern that Freddie Mac and Fannie Mae don’t have enough capital to weather losses was exacerbated Monday after Lehman Brothers Holdings Inc. released a report saying a new accounting rule may require them to raise more money.
“An accounting principle should not drive a capital decision by a regulator,” Lockhart told reporters Tuesday morning at a mortgage conference in Arlington, Va., sponsored by the Federal Deposit Insurance Corp. In the interview, Lockhart said Fannie Mae and Freddie Mac “have the same risks whether it is on or off the bal- ance sheet.” Freddie Mac plunged 18 percent and Fannie Mae slumped 16 percent in New York Stock Exchange composite trading Monday, their steepest one-day declines since November. Freddie Mac rose $ 1. 55, or 13 percent, to $ 13. 46 Tuesday in New York Stock Exchange trading. Fannie Mae rose $ 1. 88, or 12 percent, to $ 17. 62. The percentage increases are the most since March 18.
“Things got scary yesterday,” said Paul Miller, an analyst with Friedman, Billings, Ramsey in Arlington, Va. Lockhart “has to stabilize the markets. All this works on faith; there’s so much leverage in the system that if the faith breaks down in Fannie and Freddie, the whole system collapses.” The government-chartered companies own $ 1. 5 trillion in home-loan investments and guarantee $ 4. 1 trillion in mortgage securities that are kept off their balance sheets.
Fannie Mae so far has raised about $ 14. 4 billion since November to offset write-downs on mortgages it owns or guarantees. Freddie Mac has raised $ 6 billion since December and said last week it plans to add $ 5. 5 billion, which probably won’t be fulfilled until late next month.
The cost to protect the companies’ debt from default fell from the highest in more than three months.
Credit-default swaps tied to their subordinated debt dropped 8 basis points to 192 basis points, according to broker Phoenix Partners Group.
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 debt agreements. A rise indicates deterioration in the perception of credit quality.
The proposed Financial Accounting Standards 140 rule that seeks to stop companies from keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients Monday.
Fannie Mae would need to add $ 46 billion of capital and Freddie Mac would need about $ 29 billion, the Lehman analysts wrote.
The companies will probably get an exemption from the rule because it would be “very difficult” for them to raise that amount of capital, the analysts said.
A majority of the off-balance sheet assets are held in qualifying special purpose entities, which would be eliminated as part of the Financial Accounting Standards Board rule change. The companies are required to hold more than five times the amount of capital for investments held in portfolio than for off-balance sheet assets.
The reaction to Lehman’s report was disconcerting, Lockhart said.
“It concerns me that people sort of extrapolate well beyond what the facts are,” Lockhart said.
Fannie Mae and Freddie Mac, created by Congress to increase homeownership, have become one of the few avenues for new mortgage financing as competitors scaled back last year amid record increases in delinquencies and defaults. Their share of the conforming mortgage market, or new loans of $ 417, 000 or less, almost doubled to 81 percent in the first quarter.
To slow down home price declines, the U. S. government has lifted growth restrictions on Fannie Mae and Freddie Mac, eased their capital requirements and granted them temporary entry to the jumbo mortgage market since February. Information in this article was contributed by Alison Vekshin, Shannon D. Harrington and Kathleen Hays of Bloomberg News.
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