Fannie, Freddie capital can absorb losses: report

NEW YORK (Reuters) - Fannie Mae and Freddie Mac, the two biggest U.S. mortgage finance giants, have enough capital to absorb probable losses through the end of the year, reducing the need for emergency government support, according to Citigroup equity research.

Estimated second-half losses of more than $1 billion each would likely leave the two with excess capital over minimums of $20.3 billion for Fannie Mae and $12.7 billion for Freddie Mac, Citigroup analyst Bradley Ball said on a conference call on Tuesday.

"Our analysis suggests they have breathing room, and where they probably need to raise additional capital at some point, there is no urgency to do so," said Ball. He recommended buying shares despite "challenges."

The companies have come under intense scrutiny over the past few months on investor speculation that mortgage losses would cause shortfalls in capital, and lead to a bailout by the U.S. Treasury. Fannie Mae and Freddie Mac shares have tumbled since May with analysts contending a taxpayer-funded rescue could leave shares worthless.

Both companies have repeatedly increased forecasts for losses or the depth of the housing slump, fueling concerns that they are not in control of their businesses. Their increased importance to the overall health of the housing market -- they own or guarantee nearly half of all U.S. mortgages -- has raised pressure on policy-makers to intervene before they lose access to capital markets.

Shares of Fannie Mae and Freddie Mac surged for a second day, sending prices to their highest levels in a week. The shares are down more than 80 percent since mid-May.

Citigroup Inc owns shares of the two companies. The bank is also a top 10 underwriter of Fannie Mae and Freddie Mac debt which dominates the $3 trillion "federal agency" market and generates fees for related business, such as interest rate swaps.

Ball has previously asserted that shareholder interests would likely be preserved despite increased chances that the companies and policy-makers would take measures to shore up capital. Available options to improve capital ratios include easing a mandate, which was put in place following now-resolved accounting violations, that requires them to hold surplus capital, he said.

"The bears would say that's not politically palatable," Ball said. But by lowering requirements, the companies' regulator could boost confidence that the GSEs are "truly adequately capitalized" as it did earlier this year, he said.

Still, Fannie Mae and Freddie Mac will likely continue to post losses through 2009 as home price declines continue to delay recovery in the housing market, Ball said. Citi expects a recovery in home prices in the second half of next year.

Citigroup's calculations for capital adequacy in the second half of 2008 account for a $1 billion loss on the companies holdings of asset-backed securities supported by risky subprime and "Alt-A" mortgages. The companies are likely to write-down another $4 billion on those portfolios in 2009, he said.

(Reporting by Al Yoon; Editing by Tom Hals)