Fannie, Freddie say they have plenty of capital

Saviours of the suburbs: are US's twin home loan titans at risk?–
By Krishna Guha, Saskia Scholtes and James Politi–
Tuesday Jun 3 2008 13:50–
Since the onset of the credit crisis, the twin pillars of the US housing finance market have been two venerable government-sponsored enterprises: Fannie Mae (NYSE:FNM) and Freddie Mac. Now experts are wondering whether a continued decline in house prices could cause these pillars to crack.

If they did, US taxpayers could be forced to foot the bill to shore them up. Fannie and Freddie are private companies but operate under a federal charter. They support the housing market by buying and packaging mortgages into securities stamped with their guarantee, as well as holding large portfolios of these securities themselves.

Their market share has swollen since last year with the contraction of the market for "private label" mortgage-backed securities (MBS) sold by investment banks. Fannie and Freddie accounted for 84 per cent of total MBS issuance in the first quarter - up from 33 per cent at the peak of the US housing boom in 2006.

By Mark Felsenthal and Alister Bull
WASHINGTON (Reuters) - Fannie Mae and Freddie Mac said on Friday that their finances were sufficiently sound to withstand the housing crisis as government officials scrambled to restore confidence in the country's two largest mortgage finance companies.

U.S. Treasury Secretary Henry Paulson indicated that a bailout of Fannie and Freddie was unlikely despite financial market concerns that the agencies, which finance nearly half of U.S. homes, may have trouble raising enough money to keep buying mortgages.

A key senator said the U.S. Federal Reserve was considering allowing Fannie and Freddie to borrow directly from the central bank, spurring speculation that the Fed may take action as early as this weekend. Fannie and Freddie shares, after taking a beating, recovered some of their earlier losses but ending lower on the day.

Investors were worried that the mortgage agencies might run short of capital, placing the fragile U.S. economy at even greater risk and deepening the housing slump. Dodd sought to reassure investors about the health of the two companies.

"These institutions are fundamentally sound and strong," Dodd said at a news conference. "There is no reason for the kind of (stock market) reaction we're getting."

The reference to keeping Fannie and Freddie in their current form was a signal the government was not on the verge of nationalizing them, and that it wanted to see them survive as congressionally chartered but privately-held companies, a source familiar with the administration's thinking said.

Separately, the Senate passed a housing bill on Friday that included regulatory reform of agencies including Fannie and Freddie, known as government-sponsored enterprises or GSEs. It now moves to the House of Representatives, which has approved a similar measure. The White House has threatened a veto.

A former Fed policy-maker said on Friday that it was crucial that the government bolster Fannie and Freddie and their huge assets.

"It would produce a worldwide financial crisis of unspeakable magnitude if they were allowed to default," said former St. Louis Federal Reserve president William Poole.

Fannie shares closed at $10.25, down some 22 percent, but well above the session low of $6.68. Freddie closed at $7.75, down 3.1 percent, after touching a low of $3.89 earlier in the session. Both have lost close to 90 percent of their value since August. The companies' bonds, however, posted gains.

Bondholders theoretically would have priority in any insolvency.

SUNDAY FIREWORKS?

Fannie and Freddie own or guarantee $5 trillion of debt, close to half of all U.S. mortgages. They have been hit hard by the nation's housing crisis, suffering billions of dollars of losses and higher borrowing costs as many investors lose confidence they can raise sufficient capital to stay afloat.

Since the crisis began, Fannie and Freddie have lost more than $11 billion, and raised some $20 billion of capital.