July 8 (Bloomberg) -- Freddie Mac and Fannie Mae, whose shares have tumbled more than 60 percent this year, have enough capital to survive a slump in the housing market and meet new accounting rules, their regulator said.
The two largest U.S. mortgage-finance companies, are adequately capitalized and ``should ride out'' the mortgage crisis, James Lockhart, the director of the Office of Federal Housing Enterprise Oversight, told CNBC.
``An accounting principle should not drive a capital decision by a regulator,'' Lockhart later told reporters at a mortgage conference in Arlington, Virginia, today sponsored by the Federal Deposit Insurance Corp.
Fannie Mae of Washington and McLean, Virginia-based Freddie Mac, which reported combined losses of more than $11 billion, are stumbling just as the government is leaning on them to pull the economy out of the worst housing slump since the Great Depression. Concern that Freddie Mac and Fannie Mae don't have enough capital to weather losses was exacerbated yesterday after Lehman Brothers Holdings Inc. released a report saying a new accounting rule may require them to raise more money.
Freddie Mac plunged 18 percent and Fannie Mae slumped 16 percent in New York Stock Exchange composite trading yesterday, their steepest one-day declines since November, as speculation increased that they may need to raise cash. Freddie Mac fell 9 cents to $11.82 at 11 a.m. in New York Stock Exchange composite trading. Fannie Mae fell 33 cents, or 2.1 percent, to $15.41.
`Works on Faith'
``Things got scary yesterday, said Paul Miller, an analyst with Friedman, Billings, Ramsey in Arlington, Virginia. Lockhart ``has to stabilize the markets. All this works on faith, there's so much leverage in the system that if the faith breaks down in Fannie and Freddie, the whole system collapses.''
The government-chartered companies own $1.5 trillion in home-loan investments and guarantee $4.1 trillion in mortgage securities that are kept off their balance sheets.
Fannie Mae so far has raised about $14.4 billion since November to offset writedowns on mortgages it owns or guarantees. Freddie Mac has raised $6 billion since December and said last week that plans to add $5.5 billion probably won't be fulfilled until late next month.
The cost to protect the companies' debt from default fell from the highest in more than three months.
Credit-default swaps tied to their subordinated debt dropped 8 basis points to 192 basis points, according to broker Phoenix Partners Group.
Capital Decisions
Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. A rise indicates deterioration in the perception of credit quality; a decline, the opposite.
The proposed FAS 140 rule that seeks to stop companies from keeping assets in off-balance sheet entities may force Fannie Mae and Freddie Mac to bring mortgages back onto their books, requiring them to put up capital, Lehman analysts led by Bruce Harting wrote in a note to clients yesterday.
Fannie Mae would need to add $46 billion of capital and Freddie Mac would need about $29 billion, the Lehman analysts wrote.
The companies will probably get an exemption from the rule because it would be ``very difficult'' for them to raise that amount of capital, the analysts said.
Extrapolating
A majority of the off-balance sheet assets are held in qualifying special purpose entities, which would be eliminated as part of the Financial Accounting Standards Board rule change. The companies are required to hold more than five times the amount of capital for off-balance sheet assets than for investments held in portfolio.
The reaction to Lehman's report was surprising, Lockhart said.
``It concerns me that people sort of extrapolate well beyond what the facts are,'' Lockhart said. ``Fannie and Freddie are continuing to do their job in the marketplace. They were created for just this type of marketplace and they are continuing to fulfill their function.''
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