Fannie Mae Protests Proposed New Rule

Fannie Mae, one of Wall Street’s favorite big-name growth stocks of the 1990s, is launching a preemptive strike against its regulator amid speculation the mortgage giant may fall short of a tough new “risk-based” capital standard.

The Office of Federal Housing Enterprise Oversight has drafted a risk-based capital rule that’s causing anxiety at the company because it could renew a debate over whether Fannie Mae has sufficient financial reserves.

The agency reviews the financial health of Fannie Mae and its sister agency Freddie Mac and issues reports to Congress.

The two companies--both of which are congressionally chartered but shareholder-owned--were created to supply liquidity to the U.S. mortgage market. The firms buy mortgages from lenders, repackage them and sell them to investors via mortgage-backed bonds.

They have grown dramatically in the 1990s, and their stocks have been stellar performers: Since 1989 Fannie Mae shares have soared 770% and Freddie Mac’s have rocketed 1,034%. Those compare with a 247% rise in the Standard & Poor’s 500 index over the same period.

Capital is a measure of the financial cushion a company has to tide it over in bad economic times. In the case of Fannie or Freddie, that cushion is needed to absorb loan losses and the negative effects of interest rate swings.

Fannie Mae spokesman John Buckley says the company has enough capital--and, under current standards, it does. Although Fannie Mae hasn’t seen the proposed 700-page rule, Buckley said conversations with the regulator suggest the proposal will show Fannie Mae would not meet the proposed risk-based guidelines.

“Their message to us, verbally, is [that] their 700-page contraption would result in some kind of capital shortfall,” Buckley said.

Jamie Gorelick, vice chairwoman at Fannie Mae, wrote a letter objecting to a rule that creates “a perception of capital inadequacy where none occurs.”

Such a perception could put pressure on Fannie Mae’s stock. It fell $1.88 to close at $74.06 on Monday after reaching a record high of $76.13 last week. Freddie Mac shares lost $1.69 to close at $63.44 on Monday after peaking at $65.38 last week. Both trade on the New York Stock Exchange.

“We are confident that we will be able to meet any reasonable stress test,” Gorelick wrote. The letter was reported in Monday’s editions of the American Banker newspaper.

Under current measures, Fannie Mae and Freddie Mac have enough capital. As of June 30, Fannie Mae held core capital of $14.2 billion, above the federally mandated minimum capital requirement of $13.8 billion. Freddie Mac held core capital of $8.26 billion, above its minimum of $8.01 billion.

Core capital includes common stock; some kinds of preferred stock; paid-in capital, or money companies receive in exchange for their stock; and retained earnings, or earnings that aren’t paid to shareholders.

The proposed risk-based model, four years in the making, would impose a more stringent measurement of capital. It would measure credit, market, interest rate and operational risks.

“They’ve had to design it by scratch,” said Ted Beason, the recently departed staff director of a House Banking subcommittee overseeing Fannie Mae.

The idea for the new rules was sparked in part by the credit problems U.S. lenders faced in the late 1980s and early 1990s. Both Fannie and Freddie enjoy an implicit federal support that attracts investors to their debt securities on the assumption that the government wouldn’t let the companies fail.

If Fannie or Freddie were to fall short of the guideline, analysts say there are numerous ways the firms could comply with the rule, including altering the risks they take or boosting their capital through stock offerings or other securities sales.