‘Fannie, Freddie need $100bn to cover housing losses’

[LRE]

‘Fannie, Freddie need $100bn to cover housing losses’

By James Quinn

America’s two largest mortgage finance houses need to raise as much as $100bn ($53.8bn) to cover potential losses as a result of the continued decline in the US mortgage market, a banking analyst has claimed.

The staggering suggestion is the largest published to date by any industry analyst as to the size of the possible funding shortfall at Fannie Mae and Freddie Mac, which own or guarantee $5,000bn of American mortgages, some 70 percent of the market.

Shares in the pair fell for the fourth day to new 18-year lows as speculation increased that the US Treasury will bail out the mortgage-finance companies, wiping out shareholders.

Fannie was down 11.15 percent at $5.34, while Freddie was 12.5 percent lower at $3.65 just before midday in New York. Both have fallen more than 80 percent since the start of the year.

Although Josh Rosner, of consulting and research house Graham-Fisher, argues that the minimum the pair need to raise is at least $40bn, he believes the realistic number is more like $100bn.

His estimates are based on the roughly $3,500bn in guaranteed books of business the two firms hold, and are based on past peak losses of approximately 1.3 percent in the 2002-03 housing downturn.

The extent of the current housing crisis is far worse than it was six years ago, which means the scale of the pair’s problems could be as deep as Mr Rosner suggests.

For his part, Fannie Mae chief executive Daniel Mudd reiterated that the company has more capital than it ever has had and that it has not asked nor been offered help from the US Treasury.

However the Treasury and the Federal Reserve did put in place sweeping powers last month to enact a government bail-out of either or both should it be necessary.

“This whole backstop mechanism was set up so the actual need for it could be avoided,” said Mahesh Swaminathan, a mortgage strategist for Credit Suisse in New York told Bloomberg. “The market is testing the Treasury’s resolve.”

Senior Freddie Mac executives are reported to be meeting with the Treasury today, potentially to get some clarity about how the government will support the company if necessary, having been forced to pay a record premium for a $3bn debt issue on Tuesday. Freddie and Fannie have $223bn of bonds due by the end of the quarter and their success in rolling over that debt may determine whether they can avoid a federal bailout.

Fannie has about $120bn of debt maturing at the end of September, while Freddie has $103bn, according to figures provided by the companies and data compiled by Bloomberg. Information appearing on telegraph.co.uk is the copyright of Telegraph Media Group Limited and must not be reproduced in any medium without licence.
Wall Street Correspondent

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