Fannie, Freddie regulator sees more risk ahead
WASHINGTON (Reuters) - The unsettled U.S. mortgage and housing markets have left Fannie Mae (FNM.N) and Freddie Mac (FRE.N) exposed to serious risks, their federal regulator said on Tuesday.
The two, the top U.S. housing finance companies, are under stress as they walk a line between curbing record losses and increasing their role in stabilizing the ailing U.S. housing market.
But as they try to boost the mortgage market, "both companies remain classified as significant supervisory concerns," the Office of Federal Housing Enterprise Oversight said in its annual report to Congress.
"The extraordinary declines in the housing and mortgage markets have greatly increased their credit and interest rate risks," OFHEO director James Lockhart said in a letter to lawmakers.
Despite the turmoil, OFHEO concludes that the two government-sponsored enterprises have done good work to buttress internal controls and prepare themselves for the rocky market.
The report "was more upbeat, as the GSEs have remedied nearly all of their accounting and control issues, and are both issuing financial statements on a timely basis," wrote Credit Suisse analyst Moshe Orenbuch in a research note.
"However, OFHEO noted that each remains a significant supervisory concern, as a result of their poor performance and increased credit and other risks in the environment," he added. Credit Suisse maintained its "underperform" ratings on the companies.
Fannie Mae and Freddie Mac "need to raise additional capital" in order to protect themselves against losses even though they have recently won some relief to expand their mortgage investments, OFHEO said.
The companies are expected to raise significant capital to supplement a move by the regulator to relax constraints last month on the two, the biggest providers of U.S. home loan funding.
Capital has become the main focal point for the GSEs, which must walk a line between pleasing lawmakers and regulators with mortgage purchases and protecting shareholders from dilution of stock and credit losses. The companies in the fourth quarter raised $14 billion in capital with sales of preferred stock, but much of that was eroded by $6.1 billion in combined losses for the period.
Fannie and Freddie have for years been under tight oversight and rules limiting their growth.
In March, the companies were permitted to expand their mortgage investments and OFHEO said it expects to allow them to increase holdings further this year.
(Reporting by Patrick Rucker; Editing by Leslie Adler)
