Freddie Mac, Fannie Mae Plunge on Capital Concerns (Update4)
By Jody Shenn and Shannon D. Harrington
July 7 (Bloomberg) -- Freddie Mac and Fannie Mae fell to the lowest in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.
Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.
``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''
Fannie Mae and Freddie Mac have declined more than 60 percent this year, with declines accelerating in the past two weeks, on concern the companies' capital raisings since December may not be enough to overcome writedowns. Washington-based Fannie Mae so far has raised $6 billion in capital to offset writedowns on mortgages it owns or guarantees. Freddie Mac, based in McLean, Virginia, raised $13.5 billion since December and said last week plans to add $5.5 billion probably won't be fulfilled until late next month.
Growing Delinquencies
Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.
The new FAS 140 rule that seeks to stop companies 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 today.
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.
Fannie Mae and Freddie Mac, ``have been battered every single trading session,'' said Quincy Krosby, chief investment strategist for The Hartford, which manages $380 billion in Hartford, Connecticut. ``At some point they're going to stabilize.''
`Apprehension'
As mortgage delinquencies grow at a record pace, the companies likely will take further losses, Tierney said. Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to RealtyTrac 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, S&P/Case-Shiller home-price index.
``There's probably an accumulation of events today that has focused investor selling,'' said Christopher Sullivan, who oversees $1.3 billion as chief investment officer at United Nations Federal Credit Union in New York.
Fannie Mae and Freddie Mac were both trading at more than $60 as recently as October as they distanced themselves from accounting frauds that caused more than $11 billion of restatements. Then defaults on subprime mortgages caused the credit markets to seize up and credit losses to rise. The companies, which own or guarantee almost half of the $12 trillion in U.S. residential mortgages, were so integral to boosting the housing market that Congress lifted restrictions on their buying power to help revive the economy.
Agency Spreads
``The provision discussed by Lehman could have an effect on our ability to serve the housing mission,'' Freddie Mac spokeswoman Sharon McHale said. ``We would hope FASB would take into account our mission'' when it writes the final rule, McHale said.
Brian Faith, a Fannie Mae spokesman, declined to comment.
Yields on agency mortgage securities relative to U.S. Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.
Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in a note to clients.
``Balance sheets are constrained,'' Hackel said, referring to agency mortgage bonds. Bank of America spokesman Scott Silvestri declined to comment.
The difference between yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.
Freddie Mac, the second-largest U.S. mortgage-finance company, said it's ``unlikely'' to raise capital until after reporting second-quarter earnings next month.
Capital-Raising Delay
Executives told investors in May that the company would obtain $5.5 billion in additional reserves by ``mid-year,'' after registering its common stock with the Securities and Exchange Commission.
The cost to protect the subordinated debt of Fannie Mae and Freddie Mac rose to the highest since March 17, according to CMA Datavision in London. Credit-default swaps tied to debt of Freddie Mac and Fannie Mae rose 18 basis points to 195 basis points, indicating deteriorating perceptions about the companies' credit quality, CMA data show.
`Catching Up'
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.
A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.
Fannie Mae contracts closed at a record 260 basis points on March 13, according to CMA prices. Freddie Mac contracts reached 263 basis points on the same day.
``The stock market has just recently been catching up with the risk perceptions of the bond market,'' James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York.
To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net; Shannon D. Harrington in New York at sharrington6@bloomberg.net
Last Updated: July 7, 2008 17:04 EDT |
