Report warns of banks new capital needs

Fannie Mae and Freddie Mac shares plunged to their lowest in nearly 16 years on last night while costs to insure their debt against…

Fannie Mae and Freddie Mac shares plunged to their lowest in nearly 16 years on last night while costs to insure their debt against default rose on concern the two largest US mortgage funders may need to raise vastly 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 reduced positions in response to the latest worries, analysts said.

Yesterday's carnage was only the latest setback for Fannie Mae and Freddie Mac, which each have lost more than three-quarters of their stock market value since last August when a crisis initially believed contained to the subprime mortgage market erupted into a global credit crisis.

Freddie Mac's stock tumbled nearly 18 per cent in New York trading to close at $11.91, the lowest close since November 1993, while Fannie Mae shares dropped more than 16 per cent, to end at $15.74, their lowest since July 1992.

Their credit default swaps, meanwhile, rose 7 basis points to 82 basis points, meaning it costs $82,000 a year to protect $10 million of their debt for five years, according to data from Phoenix Partners Group.

The shares crumbled after a Lehman Brothers report said a pending accounting change could force Freddie Mac and Fannie Mae to raise an enormous amount of capital at a difficult time.

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.

In a caveat, Lehman's analysts, led by Bruce Harting, said the companies may get exemptions given the gravity of the impact on the fragile US housing market.

But the downturn in prices of risky mortgage assets held by Freddie Mac and Fannie Mae as the credit crisis worsened has also boosted chances for greater losses, analysts said. Prices on some subprime bonds hit record lows last week, gauging from derivative indexes.

The accounting issue "piled on to other folks' previous estimates that the companies might be forced to take (losses)" on subprime and other risky mortgage assets, said Thomas Lawler, a former Fannie Mae portfolio manager and founder of Lawler Economic & Housing Consulting in Leesburg, Virginia.

Accounting issues would add to the difficulties facing the two government-sponsored enterprises. Both have been struggling to strike a balance between stabilizing the ailing US housing market while protecting themselves from deeper losses.

Agencies