Fannie and Freddie need $75 billion

$75 billion is the capital shortfall that Fannie Mae and Freddie Mac are facing, according to a report by Lehman Brothers. This type of worry is the reason for their sudden fall in the markets yesterday.

Fannie Mae and Freddie Mac triggered a surge in the cost of protecting company debt from default to the highest in 14 weeks on concern the two largest U.S. mortgage finance companies may need to raise $75 billion.

Credit-default swaps on the Markit iTraxx Crossover index of 50 companies with mostly high-risk, high-yield debt ratings increased 23 basis points to 560, the highest since March 31, according to JPMorgan Chase & Co. at 12:05 a.m. in London. In Tokyo the Markit iTraxx Japan index climbed 2 to 150, Morgan Stanley prices show.

Record delinquencies on home loans already helped cause financial companies worldwide to write down more than $400 billion on debt holdings and prompted Fannie Mae and Freddie Mac to raise almost $20 billion in new capital. They may need as much as $75 billion more as new accounting rules require them to bring off-balance sheet mortgages on to their books, according to Lehman Brothers Holdings Inc. analysts led by Bruce Harting.

“Fannie and Freddie spooked everything,” said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. “At this stage in the cycle, it is very difficult to raise capital.”

Bloomberg News, 8 Jul 208

All of this should come as no surprise really. Why wold anyone think Freddie and Fannie are immune to the mortgage meltdown? These two organizations are at the center of the mortgage crisis. I would argue they are less immune than other financial institutions. One should fully expect large losses on their mortgage portfolios going forward and the need for new capital.

Fannie and Freddie cannot continue to function in their present form if this credit crisis continues for much longer. I am already on record for anticipating a re-nationalisation of Fannie and Freddie down the line, the Lehman report makes it clear why?

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