Fannie/Freddie may need to raise MUCH more capital

Below a story from Housing Wire, which itself quoted some figures in the Journal. Bottom line is that Fan and Fred don’t have the capital to back the mortgages they’ve guaranteed and will need to hit the markets for more at some point. I’ve written that Fan has at least $400 billion of subprime and Alt A exposure (and you don’t have to take my word for it). Given the losses in the subprime, Alt A, and even prime mortgage markets–what with the huge growth of negative equity in a world of falling house prices–it seems inevitable that Fannie will need more than the $40 billion of capital it has on hand.

Part of the reason both Fannie Mae and Freddie Mac’s stock has been punished recently is because of general concern over whether both GSEs can successfully weather the housing storm using current capital; the Wall Street Journal reported Wednesday that some market participants have been pricing in the expectation that both Fannie and Freddie will likely need to issue new stock. And alot of it.

The Journal estimated that both GSEs might need to pump out $20 billion in new issues this year, a number that could potentially double Freddie’s current float while diluting Fannie’s shares by as much as 50 percent.

From the story:

Equity issues of around $10 billion would have seemed outlandish just months ago, especially since Fannie and Freddie late last year raised new funds by selling $7 billion and $6 billion respectively in preferred stock. But the credit contagion has caused markets to question the ability of Fannie Mae and Freddie Mac to support the troubled housing market.

… In a recent research note, Friedman, Billings, Ramsey & Co. analyst Paul Miller suggests the companies should have capital equal to 3% of their direct mortgage holdings and 0.8% of those they guarantee. For Freddie, that would require $38 billion of capital, while Fannie would need $41 billion.

The rub is which capital measure an investor uses to see whether they meet that threshold. Fannie and Freddie publish several different ways of looking at this measure. There is capital defined by Ofheo, which excludes certain losses. On that basis, the companies are adequately capitalized, although markets don’t see it that way.

Then there is capital as measured under generally accepted accounting standards. At $44 billion, Fannie Mae would be all right on this measure, while Freddie Mac’s $26.7 billion in equity would be way under the $38 billion suggested by Mr. Miller’s approach.

Not that every investor is demanding this sort of massive dilution, of course, but there is enough speculation around that it is clearly pressuring both Fannie and Freddie’s share price. Freddie Mac has seen shares fall by more than 67 percent in the past six months, even including yesterday’s double digit rally; Fannie’s shares have fallen by more than 65 percent in the same time frame.

Both GSEs have said repeatedly that they feel they are adequately capitalized, after completing dueling stock issues late last year. Freddie Mac CFO Buddy Piszel on Wednesday said that the GSE is not planning on raising additional capital, Reuters reported.

“From a defensive position we feel okay,” Piszel is quoted as saying. “There is no dilutive capital raise planned.”

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