March 28, 2008 / 8:41 PM / 10 years ago

Fannie and Freddie free to set size of capital raise

NEW YORK (Reuters) - Fannie Mae FNM.N and Freddie Mac FRE.N regulator on Friday said it is up to the housing finance companies to determine how much money they must raise to buoy the U.S. housing market.

The regulator, the Office of Federal Housing Enterprise Oversight, said it was clarifying an earlier statement made by its director indicating the combined amount could be as high as $20 billion, more than twice what many analysts had expected.

Ofheo this month eased constraints on the government-chartered companies in an agreement that prods them to raise “significant” amounts of capital. The move allows the GSEs to boost their support of the housing market through the purchase of hundreds of billions of dollars in loans or mortgage securities.

Freddie Mac distanced itself from such a large figure on Thursday when its Chief Financial Officer said it was not even considering raising $10 billion of new capital. A statement from Chief Executive Officer Richard Syron on Friday indicated the company understood any capital raising would be less than $3 billion, based on terms of the joint agreement.

Shares of Fannie Mae and Freddie Mac fell more than 6 percent on Friday on concern that a larger-than-expected move to raise capital would dilute shareholders’ interests. Analysts had expected the companies would each need to raise between $3 billion and $5 billion to increase asset purchases while maintaining a cushion against losses.

Capital levels at the GSEs have come under increased scrutiny in recent months. While the GSEs have enough capital now, the 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.

Ofheo Director James Lockhart made an impromptu statement in what the agency said clarified comments to Bloomberg News on Thursday indicating the companies could raise $20 billion.

“I expect the companies to determine the amount within a broad range based upon mortgage market needs, the expected return to their shareholders and the advice they receive from investment bankers,” Lockhart said.

Freddie Mac’s Syron in a statement on Friday said nothing has changed since the March 19 announcement made with Ofheo and Fannie Mae. Any capital raised would be consistent with the dollar amount of the reduction in the capital surplus mandate, he said.

The GSEs’ capital surplus mandate of 30 percent was lowered to 20 percent. Based on December data, the Ofheo-required amount would fall to $31.2 billion from $33.8 billion

Freddie Mac CFO Buddy Piszel told investors in Boston on Thursday that $10 billion in new capital “is not even in our lexicon,” according to Citigroup Inc. analyst Bradley Ball, in a research note.

Piszel asserted that Freddie Mac was not planning a “dilutive capital raise,” Ball wrote, reiterating comments made to investors in New York on February 12. The CFO also indicated it was unlikely any capital-raising effort would happen soon.

A Freddie Mac spokeswoman said Piszel confirmed his comments made on Thursday.

The timing of any capital raise is affected by the proximity of the end of the first quarter, Freddie Mac’s process of registering with the Securities and Exchange Commission, and mid-May quarterly earnings reports, according to Ball’s note.

Citigroup’s Ball recommended investors purchase the stock on “erroneous speculation” of a large capital raising effort.

A Fannie Mae spokesman declined to comment.

Fannie Mae and Freddie Mac hold charters from the government to support homeownership. They do that by raising money from investors to support combined investments of $1.4 trillion, and honor guarantees on loans backing mortgage securities they issue.

The GSEs last quarter raised nearly $14 billion in capital with preferred stock sales, but much of that has been eroded by $6.1 billion in losses for that quarter. Both boosted their estimates for credit losses in 2008 on expectations of steeper drops in U.S. home prices.

Reporting by Al Yoon; Editing by Diane Craft

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