Debts & Loans

Doubts about the U.S. government's intentions regarding Fannie Mae and Freddie Mac could drag on for months as it resists giving the two housing finance companies an explicit guarantee.

Efforts to shore up the two most important sources of funding for U.S. home mortgages appear to have been pushed aside as eruptions in the global financial system demand the focus of regulators and lawmakers, analysts said. For now, Federal Reserve Chairman Ben Bernanke and other officials are calling the guarantee "effective."

Seized by the United States in September amid concern about waning capital, Fannie Mae and Freddie Mac now have stronger government ties than the long-held "implicit" backing that lowered debt costs for decades. But "effective" support and mixed messages on the companies' public policy roles still leave the quality of their $1.6 trillion in debt open for interpretation.

"If before you thought they were ambiguous entities, I think they are more ambiguous now," said Thomas Lawler, founder of Lawler Economic & Housing Consulting in Leesburg, Virginia, who is a former Fannie Mae executive vice president.Erosion of confidence in Fannie Mae and Freddie Mac would portend bigger problems for the U.S. housing market, which is struggling to extract itself from the worst downturn since the 1930s. Less demand and higher costs for the companies' debt hurt their ability to support mortgage markets, and could prolong a recession as rates rise and credit remains tight.

Not backing down, the United States fears an explicit guarantee would add to the government's soaring borrowing needs, pushing up the price of selling debt.
An explicit guarantee could also tarnish the U.S. "triple-A" rating. The United States already places a full guarantee on loans issued via the Federal Housing Administration, whose business is booming.

A QUESTION OF CONFIDENCE

Implications that the government would rescue Fannie Mae and Freddie Mac debt investors have held strong since the 1980s, but they also invited criticism since shareholders profited. Calls for change at the government-sponsored enterprises were always blunted by their "missions" as the top U.S. mortgage funders.

Fannie Mae and Freddie Mac own or guarantee nearly half of all U.S. mortgages.

After citing growing losses at Fannie Mae and Freddie Mac last month, the U.S. Treasury thought it nipped a loss of investor confidence in the bud with pledges of up to $200 billion in capital. Yet borrowing costs for the companies have soared as investors compared the "effective" guarantee to a new federal plan to fully back some bank debt. A war of semantics over the guarantee hasn't sat well with foreign central banks, which over the past three months have cut holdings of agency securities in Fed accounts by $77 billion.

The two companies did not make executives available for interviews.

Yield premiums on five-year Freddie Mac debt have more than doubled since mid-September to nearly 1.5 percentage points above Treasuries, and are triple pre-crisis levels. Freddie Mac is slated to announce a multibillion-dollar debt issue on Tuesday, and may have to follow Fannie Mae in breaking a tradition of routine debt issues, analysts said.

Timothy Bitsberger, Freddie Mac's treasurer and a former U.S. Treasury official, was preparing on Monday for a trip to Asia where some of the biggest investors are concentrated. "Foreign investors remain on the sidelines awaiting an explicit government guarantee," analysts at Credit Suisse said in a research note.

INVESTORS WANT MORE THAN REASSURANCES

Spreads crept tighter on Friday after Fed Chairman Bernanke said a "strong and effective guarantee" of GSE obligations must be maintained. It wasn't the ironclad backing that foreign investors wanted, however, said Mahesh Swaminathan, a strategist at Credit Suisse. Last week, the Treasury noted the "effective" guarantee but declined to revisit language of the conservatorship by the Federal Housing Finance Agency. Given political implications, it is now "almost inconceivable" Treasury will refocus on the GSEs before a new U.S. president takes office, Lawler said.

Keeping the GSE support effective versus explicit was no mistake, said Todd Abraham, co-head of mortgage and government debt at Federated Investors Inc. in Pittsburgh. "In order to have a guarantee, you'd have to put (agency debt) on the government balance sheet, and (Treasury officials) don't want to do that," Abraham said.

The GSEs are consequently in a state of flux, and their ability to stabilize mortgage markets is marginalized, investors said. James Lockhart, director of the Federal Housing Finance Agency, has said investors would come to understand the companies' access to Treasury credit, and should be reassured that the government backs the debt. Analysts don't expect much GSE portfolio growth despite room to expand by a combined $203 billion. Mortgage bonds issued and bought by the companies have languished.

"In the absence of empowered management at either Fannie or Freddie ... investors would appreciate more than repetitions of 'all is well' from their now all-powerful regulator," Jim Vogel, an analyst at FTN Financial in Memphis, Tennessee, said in a research note. (Editing by Jan Paschal)