Fannie, Freddie stock, bond investors face off

By Jennifer Ablan and Al Yoon - Analysis

NEW YORK (Reuters) - Bond holders and stock holders of Fannie Mae and Freddie Mac are rooting for different teams.

Fixed-income investors want the two U.S. home finance companies to issue shares to shore up capital. But for equity investors, diluting their investment is the last thing they desire, given the spectacular drops in the shares in the last year.

The companies, which have been given a central role by Congress in restoring the U.S. housing market to health, may have to seek more capital under tougher conditions in coming months, escalating the strife between shareholders and bondholders.

Investors have watched Fannie and Freddie shares plummet more than 60 percent this year after soaring delinquencies on home loans resulted in billions of dollars of losses.

The predicament for Fannie Mae and Freddie Mac has produced a chasm between shareholders and bond holders, including those in the mammoth $4.5 trillion "agency" mortgage bond market. Money managers are not turning their backs on Fannie Mae and Freddie Mac fixed-income securities -- as many have with their shares -- on belief their money is safe.

Further deterioration in housing will harshly test the balance sheets of the companies, leaving them little choice but to ask for money from the very investors who made losing bets on previous capital-raisings.

"Their profitability is not assured," said Andrew Harding, chief investment officer of fixed-income at Allegiant Asset Management, noting that is the reason their shares are "really challenged."

It's a different story for Fannie's and Freddie's fixed-income securities. Their agency debt and mortgage-backed securities they guarantee are "protected in the sense that they are going to pay their bills," Harding added.