NEW YORK (Reuters) - The largest U.S. housing finance companies, Freddie Mac and Fannie Mae, may report $16 billion in write-downs for the fourth quarter due to the falling value of their subprime mortgage investments, according to Credit Suisse analysts.
Freddie Mac FRE.N, with $105 billion of subprime securities, could write down between $8 billion and $11 billion when it reports earnings if management deems losses in market value are “other than temporary,” they said. Fannie Mae’s FNM.N losses could be $2.25 billion to $4 billion, the analysts, led by Moshe Orenbuch, wrote in a note on Tuesday.
The government-sponsored enterprises, or GSEs, are likely to record the losses after sharp declines in the value of subprime mortgage securities measured by the top-rated ABX indexes, and another flood of downgrades by rating companies, they said. Such losses would sharply reduce capital positions for Fannie Mae and Freddie Mac, they added.
“For the past several months, we have become increasingly concerned about the potential capital impact on the GSEs’ capital positions from ‘other than temporary impairments’ on subprime and Alt-A-backed securities within their investment portfolios that were originally rated ‘AAA’,” they said.
Fannie Mae and Freddie Mac have taken a more prominent financing role in the housing market as competing sources of funding dry up. Strained capital positions could hinder the two companies’ ability to operate.
A Freddie Mac spokesman declined to comment. A Fannie Mae spokesman had no immediate comment.
“Minimal” unrealized losses for Freddie Mac and Fannie Mae of $2.9 billion and $900 million, respectively, have been recorded but not through earnings, the analysts said. A precedent of write-downs on subprime debt against fourth-quarter profit at several banks may lead the GSEs’ regulator to “compel similar actions,” they said.
Orenbuch and analyst Kerry Hueston rate Fannie Mae and Freddie Mac “underperform.”
At midday, shares in Fannie Mae rose 4.1 percent to $33.46 and Freddie Mac stock gained 6.7 percent to $29.49 after the Federal Reserve surprised investors with a 0.75 percentage point cut in its target interest rate. The lower rate should help the housing market, James Lockhart, the chief regulator of Fannie Mae and Freddie Mac, said in a CNBC interview.
Reporting by Al Yoon; Editing by Dan Grebler