Fannie, Freddie Are Too Big in Mortgages to Fail, Lawmakers Say

Fannie, Freddie Are Too Big in Mortgages to Fail, Lawmakers Say


July 10 (Bloomberg) -- Fannie Mae and Freddie Mac, the largest buyers of U.S. home loans, are too big for the government to let them fail, leading Republican and Democratic lawmakers said.

The government-chartered companies, which own or guarantee about half the $12 trillion of U.S. mortgages, can count on a federal lifeline, said Republican Senator John McCain of Arizona and Democratic Senator Charles Schumer of New York.

The remarks by the presumptive Republican presidential candidate and the head of the congressional Joint Economic Committee followed a slide in the firms' shares to the lowest level since 1991. They indicate Congress would push the administration to use government funds to prevent the companies failing and threatening a deeper housing recession.

``They must not fail,'' McCain said during a campaign stop in Belleville, Michigan, today. Fannie Mae and Freddie Mac ``are vital to Americans' ability to own their own homes,'' he said at an earlier stop in the state, one of the worst affected by the surge in foreclosures.

Central banks, pension funds and other investors hold $5.2 trillion in debt sold by the companies.

While bondholders can count on a backstop, equity investors can't expect the government to halt a tumble in the companies' shares, Representative Spencer Bachus, the senior Republican on the House Financial Services Committee, said today.

Fannie Mae slid 14 percent today to close at $13.20 in New York, down 67 percent so far this year. Freddie Mac declined 22 percent to close at $8, bringing its slump since the end of December to 77 percent.

`Continued Woes'

Stockholders should be prepared for more ``difficulties,'' said Kevin Flanagan, a fixed-income strategist in Purchase, New York for Morgan Stanley's individual investor clients. ``Continued woes, continued difficulties are the expectation and this is going to take a while to play itself out.''

Freddie Mac owed $5.2 billion more than its assets were worth in the first quarter, making it insolvent under fair value accounting rules. The fair value of Fannie Mae assets fell 66 percent to $12.2 billion, data provided by the Washington-based company show, and may be negative next quarter, former St. Louis Federal Reserve President William Poole said.

``Markets should be assured that the federal government will stand by Fannie Mae and Freddie Mac,'' Schumer said in a statement today. They ``are too important to go under,'' and Congress ``will act quickly'' if necessary, he said.

Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson, while noting the central role of Fannie Mae and Freddie Mac in ending the mortgage finance crisis, today refrained from endorsing any extra federal backing for the companies.

Future Role

The companies ``are playing a very important and vital role right now,'' Paulson said in testimony to the House Financial Services Committee. They ``need to continue to play an important role in the future,'' he said.

Fannie Mae and Freddie Mac ``are well capitalized now'' in ``a regulatory sense,'' Bernanke told the panel. Still, the companies, like all financial institutions, need ``to expand their capital bases so that they can be even more proactive in providing credit and support for the economy,'' the Fed chief said.

The federal government can't afford to take over all of Fannie Mae's and Freddie Mac's operations, because such a move would more than double federal government debt outstanding and ``have disastrous consequences for the dollar,'' said Joshua Rosner, an analyst with Graham Fisher & Co. Inc. in New York.

Instead, the government could move the companies' combined $1.5 trillion investment portfolios into a separate limited liability corporation that would gradually liquidate the assets, Rosner said. Fannie Mae and Freddie Mac would still be able to support the U.S. housing market by packaging home loans into securities they guarantee.

The U.S. Treasury, which analysts said would play a central role in any rescue of the firms, currently has the authority to buy $2.25 billion in each of the companies' debt.

BLOOMBERG