Mortgage financer Freddie Mac briefly fell short of its minimum capital requirements last fall, but quickly came back into compliance by issuing $6 billion in preferred stock in December, federal regulators said today.

Freddie Mac and its sister company, Fannie Mae, managed to build capital surpluses well above the stricter requirements put in place following accounting and management scandals that forced both companies to restate several years of earnings.

Under consent orders put in place in 2004, the government-sponsored enterprises (GSEs) are required to keep 30 percent more capital on hand than previously mandated.

According to the Office of Federal Housing Enterprise Oversight, at the end of 2007 Fannie Mae had $45.4 billion in core capital, or 9.3 percent more than the $41.5 billion required under the consent order. Freddie Mac’s $37.9 billion in core capital gave it an even more comfortable 10 percent cushion above its $34.4 billion OFHEO-directed capital requirement.

Core capital is the sum of outstanding common stock, perpetual, noncumulative preferred stock, paid-in capital, and retained earnings. Fannie and Freddie have been forced to boost core capital to offset losses resulting from a rise in delinquencies and foreclosures, and investments that include derivates used as hedges against interest-rate changes.

Freddie Mac reported mounting losses in the second half of 2007 — a $2 billion third-quarter loss was followed by $2.5 billion in losses in the final quarter of 2007 — and expects credit losses to more than quadruple to $2.2 billion this year and hit $2.9 billion in 2009 (see Inman News story).

Fannie Mae posted $5 billion in losses in the second half of the year, including $3.6 billion in the fourth quarter alone — forcing the company to issue billions in preferred stock and cut dividends. The GSEs have also been forced to trim their portfolio of loans and mortgage-backed securities held for investment, even as OFHEO removed caps on their growth and lawmakers gave the GSEs the green light to buy "jumbo light" mortgages of up to $729,750 in high-cost housing markets.

Fannie Mae officials have trimmed the company’s loan portfolio from $732 billion in October to $721 billion at the end of January. Freddie Mac’s investment portfolio also shrank from a recent peak of $732 billion last August to $717 billion in January.

OFHEO Director James Lockhart has said he will consider gradually decreasing the 30 percent additional capital requirements as Fannie and Freddie institute management and accounting changes, which would allow more room for growth in the GSEs’ loan portfolios.

Without the 30 percent additional capital requirements, Fannie Mae would have had a $28.8 billion capital surplus as of Dec. 31, and Freddie Mac a $24.2 billion cushion.

OFHEO said today that reductions in the capital requirements depend on the financial condition and risk profile of each company, as well as current market conditions. Regulators said they will also consider the importance of the GSEs remaining "soundly capitalized to fulfill their important public purpose and the recent temporary expansion of their mission."


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