Fannie Mae, Freddie Mac Bounce

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NEW YORK (July 8) - Shares of mortgage financiers Fannie Mae and Freddie Mac stabilized Tuesday, a day after plunging over worries the pair might need billions of dollars in new capital if a new accounting rule is put into effect.
Fannie Mae shares rose 37 cents, or 2.4 percent, to $16.11 in afternoon trading Tuesday, a day after shares plunged 16.2 percent. Freddie Mac shares rose 38 cents, or 3.2 percent, to $12.29 after sliding 17.9 percent on Monday.
At issue with Fannie Mae and Freddie Mac - the nation's largest purchasers of mortgages - is how a new potential accounting rule could affect their capital requirements.
The Financial Accounting Standards Board is reviewing a rule that might force financial firms to take mortgage-backed securities that are currently off their balance sheets and place them on balance sheets.
Securitizations - the sale of bonds backed by pools of loans - are one of Fannie Mae and Freddie Mac's primary sources of generating new revenue.
James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, said during an interview Tuesday with CNBC, "an accounting change should not drive a capital change."
OFHEO, which acts as Fannie and Freddie's regulator, declined to comment further than Lockhart's remarks made to CNBC.
OFHEO is working with the accounting board, Lockhart said.
If Fannie and Freddie were to have to add portions of their securitizations business back on to their balance sheets, Fannie Mae would need to raise $46 billion in cash to meet capital requirements, while Freddie Mac would need to raise $29 billion, Lehman Brothers analyst Bruce Harting wrote in a research note Monday.
Analysts widely agreed any accounting rule change likely would not affect Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac's regulator already requires reserves for off-balance sheet securitizations, Keefe, Bruyette & Woods Inc. analyst Frederick Cannon wrote in a research note Tuesday. Because of those requirements already in place, and the government's support of the GSEs role in stabilizing the mortgage market, Cannon said it is unlikely the pair would be affected by new accounting standards.
The accounting board has made no decision on changing its rules, and any proposal would include a "rigorous" review process that would likely take several months, Neal McGarity, a spokesman for the group said.
McGarity noted that there are no exceptions currently made for GSEs, but that the Office of Federal Housing Enterprise Oversight - Fannie and Freddie's regulator - does set requirements for the pair of mortgage companies.
Currently, Lockhart said the pair are well capitalized and have already committed to ensuring that remains true, as they have raised more than $20 billion since late last year.
Lockhart added that he expects Freddie Mac to complete a previously announced $5.5 billion capital increase by the end of the summer as part of its plans to shore up its balance sheet.
AP Business Writer Marcy Gordon in Washington contributed to this report.
2008-07-21 15:51:03
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