Fannie, Freddie May Need Government Assist

The U.S. Treasury is likely to have to recapitalize the two sagging government-sponsored enterprises, Fannie Mae and Freddie Mac, and may have to accomplish that goal with taxpayer money. According to a report in the August 18th edition of Barron’s, the Treasury Department and the new regulatory body, the Federal Housing Financing Agency, have told the agencies they must raise more equity. If they cannot accomplish that, the Treasury would inject taxpayer money into the agencies, according to the report. The U.S. government’s guarantee to purchase any obligations and other securities issued by Fannie and Freddie was helpful in the short term to prevent a collapse of the two entities, said Adolfo Laurenti (pictured), senior economist at Mesirow Financial. But, in the medium and long-term, they are likely to need some sort of recapitalization. He characterized their balance sheets as “in serious shape.” Laurenti said the bill that authorized the government as a guarantor contained what he called “loose text.” He said he is concerned that lax oversight of the agencies “may mean they will need a second bailout 10 years from now.” Laurenti criticized the two entities for “over-expanding” their balance sheets, noting that the average FDIC-insured institution had an equity-to asset ratio–a measurement of risk, with a higher number preferable–of about 11 percent. But, as of March 31, Fannie’s was 5 percent, and Freddie’s 2 percent. He also criticized the agencies for buying up the best mortgages for themselves, while leaving loans of inferior quality for other financial institutions. A treasury spokesperson declined to comment on the Barron’s report in a briefing this morning.