Posted on 06/27/2002 4:52:29 PM PDT by AdamSelene235
WASHINGTON, June 27 (Reuters) - U.S. mortgage finance giants Fannie Mae (NYSE:FNM - News) and Freddie Mac (NYSE:FRE - News) have enough capital and risk safeguards to survive a prolonged freefall in housing markets or big interest rate swings, their federal regulator said on Thursday.
The results are a trial run of a test by the Office of Federal Housing Enterprise Oversight (OFHEO) -- the regulator of the shareholder-owned, congressionally chartered firms -- that has been in the making since 1993. The dry run is based on the firms' finances in the first quarter of this year.
The outcome gave fresh ammunition to the companies and their supporters against allegations from industry rivals and some lawmakers that they are risks to U.S. taxpayers and poorly supervised by the government. But critics who want tighter regulation of Fannie Mae and Freddie Mac remained unimpressed.
"The results confirm that Freddie Mac is well capitalized and effectively manages their risks in the business," said Edward Golding, Freddie Mac senior vice president for financial research.
The first real test will use third-quarter information and will be released in December, OFHEO officials said.
If the agencies, who have come under fire from rivals and several members of Congress for what is regarded by some as their privileged status with the government, fail to pass the full test, the regulator would be entitled to require the companies to fix their finances.
OFHEO Director Armando Falcon said the test achieves its goal of forcing the companies, who had more than $1.3 trillion in debt outstanding at the end of 2001, to carefully manage their risks or hold additional capital where they are exposed.
"Their prudent measures combined with favorable economic conditions have resulted in their passing the standard at this stage of the one-year implementation period," Falcon said in a statement.
The strength of the U.S. housing market -- which has resulted in a 24 percent gain in home values over three years -- has cushioned lending risks, Golding said.
"Clearly housing investment is a great wealth builder. That reduces dramatically our risk of mortgage default on our current portfolio," he said.
Shares of both companies rose by early afternoon. Fannie Mae stock was up $1.53, or 2.1 percent, to $74.49 on the New York Stock Exchange, while Freddie Mac shares were up $1.53 or 2.5 percent to $61.95.
CRITICS UNMOVED
But the outcome did not satisfy critics, including FM Watch, a group representing mortgage industry rivals that want more stringent restrictions on the companies. Because of their charters and consequent advantages, Fannie Mae and Freddie Mac are referred to as government-sponsored enterprises (GSEs).
"Today's results show that the new OFHEO rule does nothing to protect taxpayers from the risk inherent in these thinly capitalized GSEs. The GSEs should be required to comply with the same risk-based capital rules that apply to every other holder of mortgage risk in the world," said Mike House, director of FM Watch.
American International Group (NYSE:AIG - News), Wells Fargo (NYSE:WFC - News), and GE Capital, a unit of General Electric (NYSE:GE - News), are among major financial services firms that support FM Watch.
A congressman who has called for tighter government supervision of Fannie Mae and Freddie Mac, Rep. Richard Baker also was unimpressed. Baker, a Louisiana Republican who chairs the congressional subcommittee that oversees the companies, said through his spokesman the result does not change his view that a stronger regulator is needed.
Congress also requires Fannie Mae and Freddie Mac to pass a minimum capital requirements test, which sets a floor of capital the companies must hold to shield against broad categories of business risk. The companies surpassed their minimum capital requirements in the first three months of the year, OFHEO said in May.
CONVENTIONAL STANDARD HIGHER
Fannie Mae's risk-based capital requirement was $20.23 billion, and the company had total capital of $26.29 billion at the end of the quarter, OFHEO said. Because the company's minimum capital requirement was higher, $24.57 billion, that level is the minimum amount the company must hold, the regulator said.
Freddie Mac's risk-based capital requirement was $5.68 billion, and the company had total capital of $21.36 billion at the end of the period, OFHEO said. The company's minimum threshold, $19.39 billion, remains the floor.
The risk-based capital rule tests the companies against high numbers of loan defaults that could result from a severe economic downturn or interest rate swings of at least 2.4 percentage points in either direction.
Fannie Mae's and Freddie Mac's use of derivatives to hedge interest rate risk has risen substantially recently and helped the companies pass the test, Falcon said. He said Freddie Mac's performance on the test was particularly strong because its interest rate hedging would allow it to maintain interest income throughout the broad rate swings envisioned in the test.
OFHEO will test the companies by both standards each quarter and will hold them to the higher of the two capital requirements, OFHEO officials said.
The test results come as several members of Congress and industry critics have questioned the ability of OFHEO to adequately regulate the large mortgage finance companies.
Baker plans two hearings in July to hear Bush administration views on the GSEs. Treasury Undersecretary for Domestic Finance, Peter Fisher, will testify at one hearing, a Baker aide said on Thursday.
However, Baker's efforts to tighten regulation of the companies have failed to gain broad support in Congress even among members of his own party.
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