Share Prices Up For Week Despite Sell-Off at End
By Zachary A. Goldfarb
Washington Post Staff Writer
Saturday, August 30, 2008
When shares of Fannie Mae and Freddie Mac dropped sharply yesterday, it marked a sour end to an otherwise unusually upbeat week for the ailing giants of mortgage finance.
Even including yesterday's declines, Fannie Mae's shares rose 37 percent on the week and Freddie Mac's shares climbed 61 percent as some analysts suggested that a government bailout might not be as pressing as many investors had supposed. The firms also succeeded in selling $3 billion in debt, paying more for the loans than they had in recent weeks but not so much that analysts found it worrisome.
But yesterday Fannie's shares fell 14 percent to close at $6.84 and Freddie's fell 15 percent to $4.51, a reminder that the companies face significant tests in reviving their financial health and restoring investor confidence.
The sell-off came with news that the Bank of China reduced its exposure to Fannie and Freddie's debt by 29 percent over the past two months. The companies have relied heavily on foreign investors, particularly in Asia, for support, but Asian participation in financing the companies has declined recently.
September kicks off a challenging autumn for District-based Fannie Mae and McLean-based Freddie Mac, which are the country's largest source of mortgage finance, as they seek financing from investors concerned about even greater losses at the firms.
The companies package U.S. mortgages into securities, which they guarantee and sell to investors. Fannie Mae and Freddie Mac also buy mortgage-backed securities and trade them. As the mortgage market has melted down, the companies have faced billions in losses.
Last month, Congress gave the Treasury Department authority to lend money to the mortgage giants or buy their stock to help prop them up.
A series of analyst reports helped Fannie Mae and Freddie Mac this week. The reports suggested that Fannie Mae and Freddie Mac have enough cash reserves to offset the growing losses.
Lehman Brothers analyst Bruce Harting wrote that with that capital, Fannie Mae "should get through this difficult housing cycle" and doesn't "need anymore externally raised capital."
Merrill Lynch analysts Kenneth Bruce and Cyrus Lowe wrote that "it is still premature to consider a Treasury sponsored recapitalization, in our view, as capital depletion would not likely occur for several quarters." The analysts said that the companies may not "need a capital injection," according to Bloomberg.
In addition, the companies sold short-term debt at rates that are still affordable for them and attractive to investors despite the risks posed by Fannie Mae and Freddie Mac's financial struggles.
The higher rates paid by the companies is partly attributable to the tight credit market facing all borrowers, some analysts said.
"What you're seeing with Fannie and Freddie is part and parcel of the general aversion to risk on the part of fixed income investors," said Howard Shapiro, an analyst at Fox-Pitt Kelton.
September brings important tests, including persisting questions about whether Freddie Mac can or will raise new capital to offset losses as the company promised its federal regulator months ago. Freddie Mac has said it intends to raise $5.5 billion.
Freddie Mac must also raise money to stay above a capital requirement its regulator sets and could be looking to build in a larger cushion. Freddie Mac has declined to provide a public timeline for raising this capital. Company officials have said they would like to find investors to provide capital but cannot afford the high dividends they would demand. If Freddie Mac doesn't raise the capital, the government may step in.
"It will mean that the likelihood of its needing government help would go up so much more," said Frederick Cannon, an analyst at Keefe Bruyette & Woods.
Fannie Mae says it doesn't need to raise anymore capital at present.
Some analysts disagree. In a report earlier this month, Friedman, Billings, Ramsey Group analyst Paul J. Miller wrote that Fannie Mae likely needs to raise $5 billion to $10 billion to offset growing losses.
"We believe credit losses will not peak until late 2009/early 2010, which should result in elevated provisioning," Miller wrote.
Fannie Mae acknowledges it faces ongoing difficulties. "Significant challenges remain ahead for the company as we manage through the worst housing market downturn in a generation," spokesman Brian Faith said by e-mail. "While periods of speculation and uncertainty will certainly come and go in the days ahead, the company and its management are completely focused on managing our capital position, tackling credit losses and providing liquidity and stability to the markets."
A potentially more serious challenge concerns whether the companies will continue to enjoy access to the debt markets at affordable rates.
The companies issue and pay back hundreds of billions of dollars in debt each quarter, which is used to buy mortgage-backed securities for their portfolios. The companies make money by paying less for the debt than the returns they make on the securities.
Analyst attention has focused recently on whether the companies will be able to roll over about $223 billion in debt by the end of September.
Ajay Rajadhyaksha, head of U.S. fixed income strategy at Barclays Capital, said the uncertainty surrounding the companies could lead them to pay even more for debt.
"Investors need clarity from Treasury about future [Fannie and Freddie]-related plans, even if it means emphasizing that they do not plan to put funds in," he said. "Staying in limbo does not help."
Treasury officials are weighing several factors in determining whether to intervene. But Treasury Secretary Henry M. Paulson Jr. would not wait until a catastrophic event, such as one of the companies failing in a bid to raise money from the debt markets, according to analysts close to the department.
"As long as the debt market continues to provide financing at a reasonable rate to Fannie and Freddie, it's hard to see how Treasury is going to be compelled to intervene," said Jaret Seiberg, an analyst at the Stanford Group.
Fannie and Freddie's volatile stock prices have caused confusion about the financial stability of the companies, even though the prices themselves do not have a major impact on their operations.
This year, the companies' shares have lost more than 80 percent of their value. The companies' shares rose almost every day for more than a week before falling yesterday.
The pattern has been on display before. When the Treasury announced last month that it would help keep the companies afloat if they were going to fail, their stock prices rocketed up, only to fall sharply in subsequent days.
"We don't have a clear sense yet of what the ultimate losses are going to be. The news has been negative month after month," said Shapiro, of Fox-Pitt Kelton. "It's hard for people to say with any degree of confidence whether they have enough capital to make it through."
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