THE REGULATOR of Fannie Mae and Freddie Mac yesterday tried to ease investors' fears that the two government-sponsored mortgage financiers could have to raise billions of dollars of capital in response to potential accounting changes.
James Lockhart, director of the Office of Federal Housing and Enterprise Oversight (OFHEO), said in an interview on CNBC: "I have to tell you that an accounting change should not drive a capital change."
Shares in Fannie Mae and Freddie Mac plunged on Monday after Bruce Harting, a Lehman Brothers analyst, said changes under discussion at the Federal Accounting Standards Board could force Fannie Mae and Freddie Mac to bring mortgages they have securitised back on to their balance sheets and incur a total of $75 billion (€48 billion) of regulatory capital charges.
Mr Lockhart said: "If the [securities] were brought on balance sheet it would really make no change to the risk of these firms and it would make no sense to me for it to imply a capital raise."
Freddie Mac and Fannie Mae buy mortgages in the secondary market and package them into securities that they guarantee.
Mr Lockhart said he considered the companies to be adequately capitalised, and that OFHEO was working with them to ensure that remained the case. Fannie Mae and Freddie Mac have together raised some $20 billion since the fourth quarter of 2007, roughly double their losses in the same period. Freddie Mac said in May it planned to raise $5.5 billion more.
Mr Harting said he believed Fannie Mae and Freddie Mac would be exempt from the accounting rule given their importance to the mortgage markets.
The sharp reaction to his report highlighted the continuing worries about the breadth and depth of the credit crunch. In Monday's sell-off, the companys' shares fell as much as 18 per cent and 23 per cent respectively.
Shares of Fannie Mae and Freddie Mac rose some 2.5 per cent in early trade yesterday, before retreating once more. By midday yesterday, Freddie Mac was up by 1.26 per cent and Fannie Mae had lost 1.59 per cent.
Mr Lockhart said the companies would have to work hard to safeguard their access to new capital in future.
- (Financial Times service)
