Fannie Mae, Freddie Mac shares extend rebound

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By Al Yoon
38 minutes ago


NEW YORK (Reuters) - Stocks of Fannie Mae and Freddie Mac, the largest U.S. housing finance companies, rallied for a third straight day on Wednesday as investors grew more confident their shareholdings would not be wiped out by a government intervention.


Merrill Lynch & Co. became the latest major Wall Street bank to cast doubt on speculation the Treasury would directly support the companies, since both have adequate capital to offset losses for "several quarters."

The Merrill note published Tuesday follows similar comments by Goldman Sachs Group Inc. and Citigroup Inc. that threw cold water on bailout concerns.

"Odds of Treasury stepping in and dealing with Fannie Mae (FNM.N) and Freddie Mac (FRE.N) before the end of this year have been considerably diminished," said Charles Lieberman, chief investment officer for Advisors Capital Management, LLC.

Fresh calculations by analysts on revenue and losses suggest the companies, while seen losing more money, can survive on their own, avoiding a government takeover.

Shareholders expect a nationalization to be a worse-case scenario as policy-makers don't want taxpayer money rewarding companies that took risks and pocketed billions of dollars in profit through the housing boom. Both have reported four straight quarters of losses.

A Reuters report on Friday that the Treasury believes the government-sponsored enterprises (GSEs) should remain shareholder-owned may have also dispelled fears, since the companies would have to provide profit incentives for equity holders, analysts said.

A Treasury spokeswoman at midday shot down a financial market rumor of a pending announcement on the GSEs.

At mid-afternoon in New York, shares of Fannie Mae rose about 12 percent to $6.28, while Freddie Mac stock climbed more than 16 percent to $4.62.

Analysts and policy-makers have conceded Fannie Mae and Freddie Mac will likely be forced to increase the amount of capital they hold relative to their investments, making them less profitable. However, their portfolios have surged as their regulator eased a capital surplus requirement earlier this year, sending interest-income soaring.

Freddie Mac grew its portfolio to record last quarter, nearly doubling net interest income to $1.5 billion as its spread between funding costs and mortgage assets widened. Profit margins between GSE assets and funding costs are at their widest levels in at least a decade, according to a Citigroup slide presentation on Tuesday.

"It's a little of a race between the profits on the portfolios and the losses they are taking on defaults and mark-to-market write-downs," Lieberman said. "At the same time, data is looking like the housing market is near a bottom."

That said, the mortgage market continues to struggle. In part, that is due to Fannie Mae and Freddie Mac which have sharply increased the costs to lenders, and consumers, for obtaining a home loan.

Federal Reserve policy-makers at their August 5 meeting suggested stress on the two companies was potentially worsening the housing slump.

Such fear fueled talk that a bailout was inevitable, but given price drop of 80 percent or more since May, shares are now "overly-discounting a possibly catastrophic event," Merrill Lynch analysts, led by Kenneth Bruce, said in a note.

"Still, it will become increasingly difficult for policy-makers to ignore the GSE situation, as risks of further contraction in the mortgage market are as unpalatable as a high-profile bailout," said Merrill analysts, who kept their "underperform" rating and cut price targets on the shares.

Douglas Kass, founder of Seabreeze Partners Management, said he was maintaining bearish bets on Fannie Mae and Freddie Mac despite the recent recovery in their share prices.

Fannie Mae's troubles have now spread to the apartment industry, where it and Freddie Mac have expanded their role as the credit crunch sidelines other commercial property funding programs.

Mid-America Apartment Communities (MAA.N) late on Monday said its joint venture with Fannie Mae would cease making new acquisitions toward its goal of having $500 million in assets.

Perhaps the most immediate issue facing Fannie Mae and Freddie Mac -- their access to debt markets -- continued unabated as the former sold $2 billion in notes on Wednesday. The issues sold at interest rates higher compared with sales a week earlier, following widening in "agency" debt in the past few days, said William O'Donnell, a strategist at UBS.

The debt of the two companies had rallied last week as bondholders bet a government bailout would make the securities more like ultra-safe U.S. Treasuries.

"The GSEs are still getting funded," he said. "And even if funding levels are getting cheaper, there's a good chance their assets (being funded) are also getting cheaper, and what we care about is potential profitability."

Fannie Mae sold its 3-month bills at 21 basis points below the London interbank offered rate, compared with 29.5 basis points below Libor last week, O'Donnell said. The Federal Home Loan Banks, which raise money for U.S. banks to originate residential loans, on Tuesday issued three-month bills at a more costly 18 basis points less than Libor, he said.

(Additional reporting by Ilaina Jonas and Jennifer Ablan in New York and Patrick Rucker in Washington; Editing by Tom Hals)

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Fannie Mae, Freddie Mac shares extend rebound

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