Freddie Mac and Fannie Mae fell to their lowest levels in 13 years in New York Stock Exchange composite trading as concerns grew the two largest U.S. mortgage-finance companies may need to raise more capital to overcome writedowns and satisfy new accounting rules.
Freddie Mac fell 18 percent and Fannie Mae dropped 16 percent after Lehman Brothers Holdings Inc. analysts said in a report Monday that an accounting change may force them to raise a combined $75 billion. Speculation that the companies may take further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.
“There's a lot of apprehension about writedowns,” Tierney said. “If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.”
Fannie Mae and Freddie Mac have declined more than 60 percent this year, with declines accelerating in the past two weeks, on concern the companies' capital raisings since December may not be enough to overcome writedowns.
Washington-based Fannie Mae so far has raised $6 billion in capital to offset writedowns on mortgages it owns or guarantees. Freddie Mac, based in McLean, Va., raised $13.5 billion since December and said last week plans to add $5.5 billion probably won't be fulfilled until late next month.
Brian Faith, a Fannie Mae spokesman, declined to comment as did Michael Cosgrove, a Freddie Mac spokesman.
Freddie Mac fell $2.59 to $11.91 after earlier dropping as low as $10.28. Fannie Mae declined $3.04 to $15.74 and earlier fell to $14.65.
The new FAS 140 rule that seeks to stop companies keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients today.
Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.
The companies will probably get an exemption from the rule because it would be “very difficult” for them to raise that amount of capital, the analysts said.
Fannie Mae and Freddie Mac, “have been battered every single trading session,” said Quincy Krosby, chief investment strategist for The Hartford, which manages $380 billion in Hartford, Conn. “At some point they're going to stabilize.”
As mortgage delinquencies grow at a record pace, the companies likely will take further losses, Tierney said. Banks repossessed twice as many homes in May as they did a year ago and foreclosure filings rose 48 percent, according to RealtyTrac Inc., a real estate database in Irvine, California. Home prices in 20 U.S. metropolitan areas fell 15.3 percent in April by the most on record, S&P/Case-Shiller home-price index.
Fannie Mae and Freddie Mac were both trading at more than $60 as recently as October as they distanced themselves from accounting frauds that caused more than $11 billion of restatements. Then defaults on subprime mortgages caused the credit markets to seize up and credit losses to rise. The companies, which own or guarantee almost half of the $12 trillion in U.S. residential mortgages, were so integral to boosting the housing market that Congress lifted restrictions on their buying power to help revive the economy.