Republican Senators Question Fannie Mae’s Capital Position

In a letter sent Monday to Office of Federal Housing Enterprise Oversight director James Lockhart and obtained by Housing Wire, four key Republican Senators questioned the capital position of Fannie Mae (FNM: 0.59 0.00%) on the heels of a $2.2 billion first quarter loss reported last week. Senators Chuck Hagel (R-NE), John Sununu (R-NH), Elizabeth Dole (R-NC), and Mel Martinez (R-FL) jointly expressed concern at OFHEO’s loosening of an excess capital surcharge on Fannie Mae in light of continuing losses, and a plan to raise an additional $6 billion in capital.

“Are you concerned the the $6 billion Fannie has promised to raise in capital will not support new lending and greater mortgage market liquidity, but instead go to cover more of its losses?” the Senators asked in the question-laden letter sent to Lockhart.

The group also signaled concern over $9.3 billion in unrealized losses on securities held in Fannie’s portfolio: “If Fannie doesn’t recover the full value of these securities, how would that affect its capital position?” the letter asked.

Fannie Mae held roughly $42.7 billion in core capital at the end of the first quarter; critics have contended that both Fannie Mae and sister GSE Freddie Mac (FRE: 0.65 +1.56%) are too thinly capitalized to successfully backstop a flailing U.S. housing market, as many regulators and legislators have hoped.

Losses of just 5 percent on either firms’ massive mortgage portfolio would likely be enough to wipe out shareholders, some equity analysts and investment managers have suggested.

Despite concerns over capital constraints, Fannie will see restrictions on its required core capital level loosened further from 20 percent to 15 percent above statutory minimums, the Office of Federal Housing Enterprise Oversight said after Fannie’s first quarter earnings report; the current GSE regulator said it may further reduce its requirement to 10 percent in September. OFHEO first loosened its capital surplus charge in the middle of March from an originally-imposed 30 percent level for both Fannie and Freddie.

The concern by Senate Republicans echoes recent warnings from analysts at UBS Investment Research, who argued that both GSEs face “severe” capital pressures. HW covered the UBS report in March, which concluded that both Fannie and Freddie’s capital positions likely put neither firm in a position to aggressively soak up new business on a large scale.

For his part, however, OFHEO’s Lockhart has been steadfast thus far in asserting that the latest round of new capital will be enough to tide the GSEs over until the housing and mortgage markets recover, and that fresh capital will enable both Fannie and Freddie to aggressively move to restore liquidity to much of the mortgage market.

Lockhart said last week that the additional capital would likely be enough to shield the GSEs from a 10 percent further drop in home prices.

A question of value
Hagel and other Republican Senators also said they have concerns regarding Fannie Mae’s valuation of its portfolio. The GSE reported $56.1 billion in so-called Level 3 assets in its first quarter earnings report, an accounting category signifying assets that are deemed extremely illiquid, and for which no observable input exists to determine market price.

“Can you assure Congress that Fannie is valuing its portfolio correctly? Are you confident that Fannie Mae is owning up to the full extent of its losses … ?” the Senators asked.

The Republican questioning anew comes as Congress is considering hotly-contested housing legislation that would, among other initiatives, establish a new regulator for both GSEs. The House of Representatives passed its version of the bill, including GSE reform, last week; the Senate Banking Committee is scheduled to mark up its version of the bill this Thursday.