Freddie Mac, Fannie Mae Plunge on Capital Concerns

Freddie Mac and Fannie Mae plunged in New York Stock Exchange composite trading on concern the two largest mortgage-finance companies may need to raise more capital.

Lehman Brothers Holdings Inc. analysts said in a report today that an accounting change may force Fannie Mae to add $46 billion of capital and Freddie Mac to add $29 billion. Speculation that the companies may need to make further writedowns also weighed on the stock, said John Tierney, a credit strategist at Deutsche Bank AG in New York.

``There's a lot of apprehension about writedowns,'' Tierney said. ``If they have writedowns, they have to raise capital. How much do they raise and how easily can they do that? Those are the questions that everybody is asking.''

Freddie Mac fell $3.31, or 23 percent, to $11.19 at 1:04 p.m. Fannie Mae dropped $3.43, or 18 percent, to $15.35. The cost to protect against a default by Fannie Mae or Freddie Mac on their bonds also rose.

Brian Faith, a Fannie Mae spokesman, didn't immediately return a call for comment. Michael Cosgrove, a Freddie Mac spokesman, declined to comment.

FASB Rule

Fannie Mae and Freddie Mac will probably get an exemption from the new FASB 140 rule that would force the companies to bring their off-balance sheet assets back onto their balance sheets, Lehman analysts led by Bruce Harting wrote in a note to clients today.

Yields on agency mortgage securities relative to U.S. Treasuries rose to the highest since March 13 on concern that banks may need to sell off the debt.

Bank of America Corp., the second-largest U.S. bank, may sell mortgage assets after buying Countrywide Financial Corp., Kenneth Hackel, the managing director of fixed-income strategy at RBS Greenwich Capital Markets in Greenwich, Connecticut, said in note to clients.

``Balance sheets are constrained,'' Hackel said, referring to agency mortgage bonds.

The difference between yields on the Bloomberg index for Fannie Mae's current-coupon, 30-year fixed-rate mortgage bonds and 10-year government notes widened 7 basis points, to 204 basis points. The spread has climbed 18 basis points since June 18.

Freddie Mac, the second-largest U.S. mortgage-finance company, said it's ``unlikely'' to raise capital until after reporting second-quarter earnings next month.

Capital-Raising Delay

Executives told investors in May that the McLean, Virginia- based company would obtain $5.5 billion in additional reserves by ``mid-year,'' after registering its common stock with the Securities and Exchange Commission.

The cost to protect the subordinated debt of Fannie Mae and Freddie Mac rose to the highest since March 17, according to CMA Datavision in London.

Credit-default swaps tied to Fannie Mae's debt rose 6 basis points to 183 basis points, CMA data show. Contracts on Freddie Mac increased 5 basis points to 182. An increase in the contracts, used to speculate on the companies' creditworthiness or to hedge against losses, signal deteriorating investor confidence.