Fannie Mae, Freddie Mac May Record More Losses, Ofheo Says

By Dawn Kopecki

July 22 (Bloomberg) -- Fannie Mae and Freddie Mac may need to record more writedowns after they expanded their purchases of non- guaranteed subprime and Alt-A mortgage securities just as other investors fled to safer investments, their regulator said.

The value of $217 billion of the so-called non-agency securities is falling as other financial firms write down their holdings, the Office of Federal Housing Enterprise Oversight said in its annual mortgage market report. Privately issued securities backed by subprime mortgages made up 9.2 percent of the companies' combined portfolio, while Alt-A represented about 5.8 percent, Ofheo said.

By investing ``heavily'' in private-label securities in 2004 and 2005, the companies ``significantly increased their exposure to fair value losses from changes in market prices,'' Ofheo said. Structured investment vehicles and securities firms, battered by $452 billion in asset writedowns and credit losses, were invested in similar securities and have contributed to the price swings that may lead to more losses at Fannie Mae and Freddie Mac under generally accepted accounting principles.

``To the extent that those institutions recognize fair value losses on their private-label portfolios under GAAP, Fannie Mae and Freddie Mac may have to do so as well,'' the Washington-based regulator wrote in the report.

Treasury Secretary Henry Paulson on July 13 asked Congress for the authority to extend credit and buy equity stakes in Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac if needed amid speculation that the government-sponsored enterprises don't have the capital to survive the biggest housing slump since the Great Depression.

Freddie Mac is Worse

Freddie Mac has as much as $24 billion of potential losses related to privately issued subprime and Alt-A mortgage securities that it now calls ``temporary'' as the company is assuming it can recover its investment when the debt matures, Credit Suisse analyst Moshe Orenbuch wrote in a July 16 research note.

Non-agency, or private-label, mortgage securities, once the most profitable home-loan debt for Wall Street, lack guarantees from Fannie Mae and Freddie Mac or U.S. agency Ginnie Mae.

``The exposure at Freddie Mac is about twice that at Fannie Mae,'' Orenbuch said in an interview. He said market conditions have deteriorated since Freddie Mac reported $18 billion in ``temporary'' losses from private label subprime- and Alt-A- mortgage securities.

The Congressional Budget Office is working on an assessment of the companies' capital needs as lawmakers weigh Paulson's request for unlimited power to fund Fannie Mae and Freddie Mac, which own or guarantee almost half of the $12 trillion in U.S. home loans outstanding.

Record Lows

Congress created Freddie Mac and expanded Fannie Mae in 1970 to promote homeownership. The shareholder-owned companies, the largest U.S. mortgage-finance providers, profit by holding mortgage assets as investments and on guarantees of mortgage- backed securities they create out of loans bought from lenders.

Subprime mortgages are primarily made to borrowers with poor credit, while Alt-A loans are often chosen by borrowers who want atypical loan terms such as proof-of-income waivers or delayed principal repayment without offering compensating attributes.

Subprime and Alt-A mortgage bonds, already trading at or near record lows, may continue their declines as banks limit purchases of some securities and are forced to sell off what they hold, JPMorgan Chase & Co. analysts said in a report last month.

Paulson has been lobbying on Capitol Hill after lawmakers balked at a July 15 hearing at his request, which the Treasury said it anticipated would be enacted this week. Paulson is trying to provide a backstop after Fannie Mae and Freddie Mac shares fell to the lowest level in more than 17 years, threatening to limit their ability to alleviate the mortgage-market collapse.

Freddie Mac Registration

Freddie Mac fell 43 cents yesterday, or 4.7 percent, to $8.75 in New York Stock Exchange composite trading. Fannie Mae rose 73 cents to $14.30 and has doubled in the past four trading days on optimism that the government won't let the companies fail. Freddie Mac is up 66 percent in the past four days.

Fannie Mae is still down about 58 percent this year, and Freddie Mac about 71 percent, drops that began amid speculation the companies don't have the capital to survive the biggest housing slump since the Great Depression. Both traded at almost $70 a share last year.

Freddie Mac registered last week with the U.S. Securities and Exchange Commission, removing the biggest obstacle to selling common stock and increasing its mortgage holdings. The company intends to proceed with a $5.5 billion capital-raising plan it announced in May that ``will include both common and preferred securities,'' according to a statement.

The registration fulfills an agreement made six years ago with lawmakers before the government-chartered company's plans stalled after revealing $5 billion of accounting errors.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.