Fannie Mae, Freddie Mac on track to buy delinquent mortgages, analysts say

By Bloomberg News
Tuesday, December 29, 2009; A12

The U.S. government's expanded capital backstops and portfolio limits for Fannie Mae and Freddie Mac increase "the prospect of large-scale" purchases by the companies of delinquent mortgages out of the securities they guarantee, according to Credit Suisse Group analysts.

The Treasury Department announced Thursday that the two mortgage-finance companies, which were seized by the United States almost 16 months ago, could tap an unlimited amount of capital for three years, up from as much as $200 billion each. It reworked caps on Fannie Mae and Freddie Mac's mortgage-asset portfolios to require the holdings to fall to $810 billion each by Dec. 31, 2010, rather than about $690 billion.

"This announcement increases the prospect of large-scale voluntary buyouts by removing the portfolio cap hurdle and helping funding by potentially increasing debt-investor confidence," Mahesh Swaminathan and Qumber Hassan, the Credit Suisse debt analysts in New York, wrote in a report Monday.

Analysts including those at Credit Suisse and J.P. Morgan Chase have been predicting a spike in the companies' buyouts of loans from their securities early next year. Aside from more purchases being required by the debt's contracts as additional loans get modified under the government's Making Home Affordable program or fall more than two years past due, accounting-rule changes will force all loans in their securities onto their balance sheets, limiting the financial impact of actually buying them.

The portfolio-limit adjustment will give Fannie Mae and Freddie Mac "enough headroom" to absorb the approximately $220 billion "pipeline" of delinquent loans in their securities without having to sell other bonds, the Credit Suisse analysts wrote.

The buyouts may occur over one or three months, the analysts wrote.

Fannie Mae on Monday jumped 22 cents, or 21 percent, to close at $1.27. Freddie Mac climbed 34 cents, or 27 percent, to $1.60.

Meanwhile, American International Group, recipient of a $182.3 billion taxpayer-funded rescue, gained the most in the Standard & Poor's 500-stock index on Monday in response to the government's actions on behalf of Freddie Mac and Fannie Mae.

"The assumption is that with the government owning effectively 80 percent of AIG, they will do the same thing and they will backstop everything in AIG's book," said Malcolm Polley, chief investment officer at Stewart Capital Advisors. "A lot of people are grasping at straws trying to find a way they can justify having paid what they paid for AIG if they bought it recently or continuing to own AIG if they never sold it."

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