OFHEO Chief Addresses Stock Sell-Off

Fannie, Freddie News Led to 'Confusion'

The sell-off Monday in shares of Fannie Mae and Freddie Mac was based on "a lot of confusion" about a perceived threat to the mortgage funding giants, a federal regulator said yesterday.

Investors dumped shares of the companies Monday after a Wall Street analyst reported that a proposed accounting change could force them to raise tens of billions of dollars and undermine their ability to support the troubled housing market.

James B. Lockhart III, director of the Office of Federal Housing Enterprise Oversight, said the accounting change would not necessarily force the companies to increase the amount of capital they must set aside as a cushion against losses. In an interview, Lockhart said his agency and federal law, rather than accounting rulemakers, control the capital requirements for the government-sponsored firms.

"I don't think there is a prospect that the companies could require a bailout," Lockhart said.

Investors appeared to regain a measure of confidence in the companies. Their stock prices recouped more than half the ground they lost Monday. Meanwhile, mortgage securities they guarantee more than recovered the ground lost Monday relative to Treasury securities, according to analyst Jim Vogel of FTN Financial Group.

Still, the companies' shares remain far below their highs of last summer, reflecting investors' anxieties about the firms' prospects and the outlook for housing in general.

"There's not that many people right now holding out hope that the recovery is going to come quick enough that they can profit within a reasonable time frame" from investments in companies tied to the mortgage market, Vogel said.

Fannie Mae and Freddie Mac play a central role in the mortgage system by buying mortgages and pooling them into securities for sale to investors, thereby freeing lenders to make more loans. Fannie Mae and Freddie Mac guarantee that they will pay the holders of the securities if the borrowers default on their mortgage payments.

The government is depending on Fannie Mae and Freddie Mac to help keep the mortgage market functioning and to blunt the decline in home prices. Their capacity to buy and guarantee loans is determined in part by how much capital they must retain as a financial safety margin.

Lehman Brothers issued a report Monday saying that an accounting change under consideration by the Financial Accounting Standards Board, a rulemaking body, could require Fannie Mae and Freddie Mac to move trillions of dollars of mortgage guarantees onto their balance sheets, which in turn would require them to increase their capital by a combined $75 billion.

That would counter recent steps by the government to loosen regulatory restraints on Fannie Mae and Freddie Mac and liberate them to increase their support for the housing market.

Lockhart, who declined to be interviewed Monday, granted interviews yesterday that appeared calibrated to reassure investors.

Simply requiring the companies to move trillions of dollars of guarantees onto their balance sheets would not change the level of risk associated with those guarantees, Lockhart said.

Lockhart told Bloomberg television that, counting the $5.5 billion of new capital Freddie Mac plans to raise in the near future and the anticipated profits on their new business, the companies have enough capital -- "assuming that the market doesn't really tank."

Congress is working on legislation to give regulators more power over Fannie Mae and Freddie Mac, including greater authority to regulate their capital, and Lockhart has long argued that OFHEO needs such expanded authority.

But Karen Shaw Petrou of the research firm Federal Financial Analytics said that under current law, OFHEO could determine that the proposed change in the accounting rules has no effect on the capital requirements for Fannie Mae and Freddie Mac.

Regardless of the accounting rules, Petrou has contended that Fannie Mae and Freddie Mac are allowed to operate with inadequate financial cushions. Her firm asserts they should increase their capital by $10 billion to $20 billion each to put them on a par with banks.

Fannie Mae's stock closed yesterday at $17.62, up nearly 12 percent from $15.74 Monday but still below last week's close of $18.78. Freddie Mac's stock closed yesterday at $13.46, up 13 percent from $11.91 Monday but still below last week's close of $14.50. Last summer, Fannie Mae's stock closed as high as $67.30 and Freddie Mac's as high as $62.28.