Fed Action Helps Fannie, Freddie

Ability of Fannie and Freddie to Raise Capital Boosted by Fed’s $200B Intervention, for Now

March 11, 2008: 05:01 PM EST

NEW YORK (Associated Press) – The ability of Fannie Mae and Freddie Mac to raise capital _ which hit rock-bottom last week _ has been boosted by the Federal Reserve’s latest market intervention.

Drained by multibillion-dollar fourth-quarter losses, the country’s biggest mortgage-finance companies are thirsting for cash so they can play a bigger role in the struggling housing market. But Fannie and Freddie, which together hold or guarantee around $4.9 trillion in home-loan debt, have had difficulty lining up buyers for their mortgage-backed securities amid tumbling home prices and rising foreclosures.

The Federal Reserve answered that call Tuesday by making available to Wall Street banks up to $200 billion in Treasury securities, with a twist _ the agency will accept as collateral the types of securities Fannie and Freddie guarantee and sell to investors.

The company’s shares, which had fallen to fresh 52-week lows in recent days, climbed sharply.

Fannie’s stock jumped $2.19, or more than 11 percent, to $22. The shares have ranged over 52 weeks from $18.50 to $70.57. Freddie shares gained $2.77, or nearly 16 percent, to $20.16. They have ranged from $16.59 to $68.12 over the past year.

Freddie didn’t return a call seeking comment. Fannie spokeswoman Marilyn Kornfeld declined to comment.

The Fed’s goal was to relieve some of the financial pressure on banks so they’ll be encouraged to lend more freely.

It wasn’t an explicit pledge by the government to back Fannie and Freddie, which was rumored last week on Wall Street to be coming _ rumors denied by the Treasury Department _ but the Fed’s action brightened the companies’ outlooks in terms of available funding.

“This is as close as it gets” to an explicit government backing, said Lance Pan, director of investment research at Capital Advisors Group Inc. in Newton, Mass. “It’s implicitly explicit.”

“I sort of think the Fed was getting to the end of their wits,” he said.

The central bank has cut a key interest rate five times in recent months and has pumped hundreds of billions of dollars into the U.S. financial system, and still banks have not been prodded into lending as the mortgage crisis has worsened.

As for the overall prospects for the seized-up credit markets, Pan added, “I’m not sure if simply providing liquidity will break the credit crunch. … If banks continue to withhold lending, I don’t know how well it’s going to play out.”

Matt Jozoff, the analyst heading mortgage research at JPMorgan Chase & Co., pronounced the Fed’s move “a nice start.”

Prices have plunged recently for the billions of dollars of Fannie and Freddie’s mortgage securities as supply has outstripped demand. Last week, the securities reached their highest point, or spread, over Treasury bonds in 22 years. That meant the mortgage securities were deemed to be far riskier relative to government securities than is traditionally the case, when they have been considered nearly as solid.

The spread swiftly tightened Tuesday morning after the Fed stepped into the market.

While the government isn’t obligated to assist Fannie or Freddie in a financial emergency, many on Wall Street believe it would bail them out if there is a collapse. The idea that they are “too big to fail” traditionally has enabled the two companies to borrow relatively cheaply by issuing top-rated securities backed by mortgages.

“The real problem is there’s really no buyer right now” for the securities packaged from mortgages, said Douglas Dachille, the CEO of First Principles Capital Management in New York.

As the worst housing crisis in a generation has unfolded in the last months, Fannie and Freddie increasingly have been called on to step up their role to help stabilize the mortgage market by buying more home loans. For that they need capital.

The $168-billion economic stimulus package enacted last month included a temporary increase in the cap on mortgages that the companies can purchase or guarantee, from $417,000 to $729,750 in high-cost markets. And, as a reward for filing timely financial statements following multibillion-dollar accounting scandals, Fannie and Freddie were freed on March 1 of a combined $1.5 trillion cap on their mortgage-investment holdings.

At the same time, as home prices have dropped and mortgage defaults have mounted, the companies have been forced to set aside billions of dollars to provide for soured loans and to sell special stock to raise capital.

They recently reported fourth-quarter losses totaling $6.1 billion and predicted multibillion-dollar losses throughout this year, amplifying concerns about their stability.