Interest Rate Roundup

Friday, July 11, 2008

Fannie Mae, Freddie Mac, Fed respond

It just keeps getting curioser and curioser. Late in the day, the Federal Reserve has denied an earlier report that it had held discussions with Freddie Mac about opening the discount window to the company.

Meanwhile, both Fannie Mae and Freddie Mac have released statements about the unfolding situation. This is what Freddie Mac had to say ...

"Freddie Mac is adequately capitalized, highly liquid and an essential part of the nation's housing system. We are in the process of finalizing our results and we estimate that at June 30, 2008, we will have a substantial capital cushion above the 20% mandatory target surplus established by our regulator, the Office of Federal Housing Enterprise Oversight ("OFHEO") and a much greater surplus above the statutory minimum capital requirement. We are not under any mandate to raise capital in the near term. OFHEO has stated that we are adequately capitalized and that we hold capital well in excess of regulatory minimums. The Director of OFHEO confirmed yesterday that we are adequately capitalized and have liquidity resources to perform our important public mission, and we are continuing to do so.

"Beyond that, there are a number of options to manage our capital position. The average rate of run-off on our retained portfolio is currently about $10 billion per month, and not replacing that run-off would free up approximately $250 million of capital per month. Over the course of a year, this would free up approximately $2.5 to $3 billion of additional capital if this run-off rate remains constant. We also could consider reducing our common stock dividend. Our current annual common stock dividend is approximately $650 million.

"Currently, Freddie Mac's liquidity position remains strong. This is a result of the combination of two factors: access to the debt markets at attractive spreads and an unencumbered agency MBS portfolio of approximately $550 billion which could serve as collateral for short-term borrowings.

"We believe current speculation in the media around the issue of conservatorship does not accurately reflect the facts. Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized.

"The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital. As the Director of OFHEO stated, we remain committed to our agreement with OFHEO to raise additional capital given appropriate conditions.

"We are pleased at the expressions of support for the GSEs in their current form from senior administration officials and members of Congress."

And this is what Fannie Mae had to say:

"Fannie Mae raised $7.4 billion of additional capital in May, for a total of more than $14 billion in new capital since November of 2007. Our capital level is substantially above both our statutory minimum capital and the OFHEO-required 15 percent surplus over minimum capital. In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history.

"As we work through this tough housing market, we are maintaining a strong capital base, building reserves for our credit losses, and generating solid revenues as our business continues to serve the market. We also have access to ample sources of liquidity, including access to the debt markets. The company issued more than $24 billion in debt this week alone, including a $3 billion benchmark note sale that was oversubscribed. In short, Fannie Mae remains well equipped to fulfill our critical role in the housing finance system, today and in the future. We will provide a full financial update and outlook when we report second-quarter results in early August.

"OFHEO has reiterated that Fannie Mae is adequately capitalized, the highest capital designation given by our regulator. More broadly, Treasury Secretary Henry Paulson and leaders in Congress have also issued statements of support, for which we are appreciative."


  • Wellllll . . . ok -- but what does all this mean to the smaller investor who is holding a Freddie Mac bond? I understand that stockholders will probably get a smaller dividend this year, but what will happen to someone who, for the sake of discussion, has a $50,000.00 Freddie Mac bond and is counting on the monthly interest from it as part of their retirement income?

    By Anonymous Anonymous, at July 12, 2008 at 2:03 AM  

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