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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: nextrade! who wrote (9516)	3/10/2003 6:22:29 PM
From: nextrade!	Read Replies (1) \| Respond to of 306849

03/10 16:22 Poole Says Crisis Possible at Fannie Mae, Freddie Mac (Update6) By Craig Torres and Albert Yoon quote.bloomberg.com Washington, March 10 (Bloomberg) -- Fannie Mae and Freddie Mac, which own or guarantee 42 percent of all U.S. home mortgages, may lack adequate capital to weather a disruption in financial markets, St. Louis Federal Reserve President William Poole said. The two government-chartered companies ``hold capital far below that required of regulated banking institutions,'' Poole told an Office of Federal Housing Enterprise Oversight symposium. ``Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets,'' he said. Shares of Fannie Mae and Freddie Mac tumbled as Poole suggested severing the government's implied backing of the companies. Fannie Mae plunged $4.35 to $58.93 on the New York Stock Exchange. The shares 6.9 percent drop was the biggest decline since October 1998. Freddie Mac declined $3.20 to $50.80. Poole's comments echoed criticism leveled against Fannie Mae and Freddie Mac by competitors such as Wells Fargo & Co. and by Representative Richard Baker of Louisiana, chairman of the House subcommittee on capital markets. They have said the companies use their government ties to boost borrowings to levels that could pose a risk to taxpayers. Fannie Mae and Freddie Mac own or guarantee $3.1 trillion of mortgages. The comments also come after Fannie Mae last year wrote down the value of financial contracts used to hedge against interest rate swings by $4.55 billion. Fannie Mae said it typically holds the contracts, also known as derivatives, to maturity, meaning its only risk is default by a counterparty, not quarterly changes in their values. Accounting rules require the contracts be written down to market values even if they are not sold. Pull Sponsorship The government should eliminate the Treasury's authority to buy $2.25 billion of the companies' debt to remove any implied sponsorship and appearances to investors that the U.S. would bail out the firms in times of trouble, Poole said. Eliminating the authority would signal the ``government is serious when it says that there is no guarantee'' of the debts, he said. Fannie Mae and Freddie Mac should also add to their capital over a period of several years, he said. The companies also need to boost their capital to levels similar to that required for banks and other regulated institutions, he said. Fannie Mae and Freddie Mac are required to keep capital of about 4 percent of their on-balance sheet assets, he said, while federally insured banks hold capital equal to about 11 percent of their assets. ``It seems hard to justify not doing what he proposes,'' said James McGlynn, who manages $5 billion at Summit Investment Partners in Cincinnati. McGlynn owns securities that would benefit if Fannie Mae shares decline. Stringent Requirements Fannie Mae and Freddie Mac countered that their capital standards are more stringent than required of banks. The Office of Federal Housing Enterprise Oversight, or Ofheo, is their main regulator. ``Our capital is tied to risk, and we are in one single line of business which is the lowest-risk lending that is done,'' said Sharon McHale, a Freddie Mac spokeswoman. ``So when we tie risk to capital standards, ours are much more stringent.'' Fannie Mae said Poole's speech suggests he ``does not understand'' the company's capital structure. While there's ``no current risk overhanging'' the mortgage lenders, now is the time to address potential problems brought on by their size and influence in the mortgage markets, Poole said. Fannie Mae and Freddie Mac make money by buying loans from banks at higher rates than they pay to borrow. They sell debt to fund mortgage purchases and also package mortgages into securities for sale to investors. Outstanding debt sold by the companies totals $855 billion for Fannie Mae and almost $700 billion for Freddie Mac. Housing Boom The companies have benefited from a record housing market. Earnings before one-time items at Fannie Mae rose to $6.39 billion last year from $3.91 billion in 1999. ``For Fannie Mae and Freddie Mac to hold more capital would slow their growth,'' said Paul Miller, an analyst at Friedman Billings Ramsey Inc. in Arlington, Virginia. Miller said he will keep his ``outperform'' rating on the stocks because Poole's proposals probably won't garner much support, given that housing is one of the few areas of the economy still growing. Debt of Fannie Mae and Freddie Mac lagged gains in Treasuries following the Poole comments, said Mike Graf, a managing director of agency debt at Merrill Lynch & Co. The yield premium, or spread, of Fannie Mae debt increased 2 basis points to 48 basis points more than the 10-year Treasury. Unseen Risks Poole said that while both Fannie Mae and Freddie Mac use models to measure the quantifiable risks of changes in credit quality and interest rates, the danger resides in nonquantifiable risks and ``unpredicted crises,'' which, he said, occur far more often than is recognized. Poole cited the failure of the Penn-Central railroad, the hedge fund Long Term Capital Management, Continental-Illinois bank, Enron Corp. and WorldCom Inc. ``Major unforeseen events that can bring about a collapse in confidence or disruption to the normal function of financial markets without any warning can and do occur with some frequency he said. Fannie Mae shares fell 18 percent in September after the lender reported its duration gap, a key measure of interest-rate risk, widened to minus 14 in August, outside its preferred range of plus or minus 6. The gap meant Fannie Mae's assets would be repaid 14 months sooner than its then $780 billion of debt. The gap had closed to zero in January, Fannie Mae said.