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To: patron_anejo_por_favor who wrote (299635)	12/22/2004 5:05:53 PM
From: maceng2	Respond to of 436258

I know what Reaper would say Re: Fannie Mae. You and the reaper are just sooo out of touch. Just joking -ng- / -g- Bonds News Fannie Mae debtholders see company on right path Wed Dec 22, 2004 02:46 PM ET By Lynn Adler NEW YORK, Dec 22 (Reuters) - Confidence in Fannie Mae debt rose after a management shake-up on Tuesday triggered by accounting errors and an enormous earnings restatement mandated by regulators, investors and analysts said on Wednesday. Volatility could surface as the company works out how it will raise needed capital, and as Congress next year hammers out legislation for stiffer oversight. But the greatest event risk is now known, and that clarity fostered market relief. Fannie Mae's top two executives left the No. 1 U.S. home funding company, which has suffered losses estimated in the billions of dollars. The company's regulator is working on a plan to restore capital, among other reforms. "Overall, I guess it's probably the first step for Fannie Mae to start to redevelop and work on their relationship with their regulator, and all of this makes it extremely clear there will be a lot more regulation in the future," said Deborah Boyer Stefani, fixed income portfolio manager at Northern Trust in Chicago. A stronger regulator that reins in Fannie Mae (FNM.N: Quote, Profile, Research) and its smaller sibling Freddie Mac (FRE.N: Quote, Profile, Research) , embroiled in its own accounting scandal last year, would curb growth and hurt their stocks while supporting their agency debt, analysts agree. This year's dearth of net new long-term agency issuance, combined with record levels of foreign buying, has pressed yield spreads to their tightest levels in 1-1/2 years. Yield premiums paid on agency and mortgage-backed securities debt versus Treasuries held their ground on Wednesday. Fannie Mae shares rose 2.7 percent on Wednesday, propped up by investor relief that management changes would help it get its accounting and regulatory problems behind it. "To see in black and white that they are below their minimum capital requirement was a little alarming to me," said Nancy Vanden Houten, analyst at Stone & McCarthy Research. "But the old adage that the market hates nothing more than uncertainty applies here. A lot of bad news is out there." Concerns shift now to the tactics Fannie Mae will use to raise its capital levels. The company is now undercapitalized, and has already agreed to boost its capital to 30 percent over its minimum requirement by the middle of 2005 because of the accounting controversy. Target dates may now change, some analysts said. Options span from dumping mortgage assets, not replacing home loans that prepay, buying back debt, suspending or cutting common stock dividends, and issuing preferred or common stock. Liquidation of the mortgage holdings could burden the MBS sector. Few analysts predict wholesale dumping, as the MBS in Fannie Mae's portfolio generate large earnings. "We are not worried about Fannie selling MBS. They can do that over a period of time, possibly nine months to a year," said Andrew Harding, taxable fixed income director at National City Investment Management Company in Cleveland, Ohio, "Letting mortgage bond prepayments run off will take care of a good part of that and there are also other ways they can raise capital." Harding said "the agencies are going toward increased regulation and deleveraging, which makes it a good story for their bonds and not so good story for equities." Also critical are the degree of power a new regulator will have, whether Congress would sever ties that lead to an implied government guarantee of Fannie Mae and Freddie Mac debt, and the ripple effects of regulation and capital levels on the companies' credit ratings. Fox-Pitt Kelton, upgrading its outlook on Fannie Mae stock to "in line" from "underperform", expects the company can reach its 30 percent capital requirement by June 2006. "In our view 95 percent of the negative event risk is now known, while not yet finished -- SEC likely fine (estimate $250 million to $500 million), DOJ likely will take action, Congress is likely (75 percent) to pass GSE (government-sponsored enterprise) regulatory reform legislation," the firm said in a Wednesday research note. (Additional reporting by Julie Haviv)