Fannie, Freddie Shares Plummet on Capital Worries

Shares of Fannie Mae and Freddie Mac, the largest providers of funding for U.S. home mortgages, closed at their lowest levels since 1992 on concern the companies need to raise more capital amid larger-than-expected losses.

Corporate "federal agency" debt obligations and mortgage-backed securities guaranteed by the companies also plummeted relative to government debt as investors thinned positions, analysts said.

Freddie Mac stock tumbled almost 18 percent Monday, to $11.91, while Fannie Mae shares dropped most than 16 percent, to $15.74.

A pending accounting change could also force Freddie Mac and Fannie Mae to raise capital at a difficult time, according to Lehman Brothers.

The rule aimed at forcing companies to account for securitized assets on their balance sheets could mandate Freddie Mac and Fannie Mae to boost capital by $29 billion and $46 billion, respectively, the analysts wrote in a client note on Monday.

But while the gravity of the rule change is great, the two companies are likely to get exemptions, the analysts said.

Concerns that Freddie Mac could suffer greater losses from mortgage insurance were also fueled on Monday after research firm CreditSights said the mortgage insurance unit of Radian Group could face more downgrades, forcing it to wind down its existing business.

That increases risks for Freddie Mac, which had $63 billion of loans or pools of loans backed by Radian as of March 31.

The exposure to the mortgage insurer weakens the position of the government-sponsored enterprises, which have been called on by Congress to do more to stabilize a housing market that analysts do not expect to improve until 2009 or later.

Since November, the GSEs have raised billions of dollars in capital to fuel growth and offset more than $12 billion in combined losses since June.

"Fannie Mae and Freddie Mac are ground zero for mortgages," said Steve Persky, chief executive at Dalton Investments in Los Angeles.

"They're the largest leveraged owners of mortgages out there, and that's not a good position to be in right now." Greater-than-expected losses and share declines at Freddie Mac would make it more difficult for the McLean, Virginia-based company to raise capital it needs to continue its business of buying and guaranteeing a huge chunk of U.S. mortgages, said James McGlynn, a portfolio manager at Summit Investment Partners in Southlake, Texas.

A Freddie Mac spokeswoman said the company does not intend to raise capital until it announces second-quarter earnings, and declined to comment on the ability to raise capital as shares fall.

The timing disappointed analysts since the company announced in May it would raise $5.5 billion.

A Fannie Mae spokeswoman declined to comment on the Lehman accounting note.

Yield premiums in the $4.5 trillion market for mortgage bonds backed by Fannie Mae and Freddie Mac jumped as stocks made new lows.

The additional yield on Fannie Mae MBS paying 6 percent interest increased by 9 basis points to 1.98 percentage points above the benchmark Treasury note.

Investors have shunned MBS over the last month on concern that stressed financial institutions — including Fannie Mae and Freddie Mac — would slow purchases or sell MBS.