Housing, accounting worries sink Fannie, Freddie
NEW YORK
Shares of mortgage giants Fannie Mae and Freddie Mac tumbled sharply Monday after a Federal Reserve official warned housing market problems would likely continue into next year and an analyst said accounting changes could leave the two woefully short of necessary capital reserves.
Freddie Mac shares plunged $2.83, or 19 percent to $11.67, while Fannie Mae shares tumbled $3.28, or 17 percent, to $15.50 in afternoon trading.
The government-sponsored enterprises are the nation\'s largest purchasers of mortgages.
In a speech in San Diego, San Francisco Federal Reserve President Janet Yellen said problems in the ailing housing market and banking system could get even worse before the economy recovers, according to media reports.
Further prolonging of the housing slump would hurt Fannie Mae and Freddie Mac\'s new business.
Lehman Brothers analyst Bruce Harting said, in a note to clients, if a proposed change to accounting standards occurred, the companies could also be billions of dollars short of capital requirements.
The Financial Accounting Standards Board has proposed a change to accounting rules that would require financial services firms move off-balance sheet securitizations to their balance sheets.
Securitizations -- the sale of bonds backed by pools of loans -- are one of Fannie Mae and Freddie Mac\'s primary sources of generating new revenue.
If Fannie and Freddie were to have to add portions of their securitizations business back on to their balance sheets, Fannie Mae would need to raise $46 billion in cash to meet capital requirements, while Freddie Mac would need to raise $29 billion, Harting wrote.
Harting did note that Fannie Mae and Freddie Mac would likely be granted an exemption to the new accounting standard because they would be so undercapitalized under the new rule it would be nearly impossible for them to raise enough cash.
The accounting board has yet to finalize any changes to current standards.
