U.S. banks may keep credit tight even in GSE bailout

By Jonathan Stempel - analysis

NEW YORK (Reuters) - A government bailout of Fannie Mae (FNM.N) and Freddie Mac (FRE.N) could help support battered shares of major banks, but might not spur lenders to extend more credit as the U.S. housing market deteriorates.

Fannie and Freddie, known as government-sponsored enterprises, own or guarantee almost half of all U.S. mortgages. The government relies on them to help stabilize what is often deemed the worst housing market since the Great Depression.

"It's a mistake to think a bailout of Fannie and Freddie is going to cause a sigh of relief by lending officers and for them to loosen credit," said Bill Hackney, managing partner of Atlanta Capital Management Co. "Damage to balance sheets has already been substantial."

Deterioration in housing and credit markets has already weighed on banks' shares.

The KBW Bank Index .BKX and Standard & Poor's Financials Index .GSPF are down roughly 30 percent this year. Shares of big mortgage lenders such as Citigroup Inc (C.N), Wachovia Corp WB.N and Washington Mutual Inc WM.N are down even more.

And Fannie and Freddie shares have slid well over 90 percent in the last year.

A federal law enacted in July gave the government broad authority to pump billions of dollars into the GSEs.

Speculation about what the government could do has included guaranteeing new Fannie and Freddie debt and preferred stock, buying such securities outright, or privatizing the companies.

"If the GSEs have adequate capital, it would be a plus for the banking sector and the economy," said Marshall Front, chairman of Front Barnett Associates LLC in Chicago.

Many of the proposals suggest holders of Fannie and Freddie "triple-A" rated senior debt would be well-protected; not so holders of their common and perhaps preferred stock.

And with their shares having lost most of their value, raising new equity capital would be tough.

Richard Hofmann, a CreditSights Inc analyst, in a report late Tuesday suggested the government "would rather stabilize Fannie Mae and Freddie Mac in their current form, and then gradually layer in more restrictive capital requirements and other regulatory oversight."

But tighter limits on Fannie and Freddie could pressure a banking sector already changed by the housing slump.

"Fannie Mae and Freddie Mac let (banks) write more loans than they would have otherwise," said James McGlynn, portfolio manager for Summit Investment Partners in Southlake, Texas.

With a collapse of much of the securitization market, where home loans were packaged into securities, banks can no longer count on finding buyers for their mortgages. This can force those banks to keep more loans on their balance sheets.