James Lockhart Does Not Buy Into Fannie and Freddie Capital Concerns But Stockholders Do

Proposed changes in accounting rules that could force Fannie Mae and Freddie Mac to move certain Mortgage Backed Securities (MBS) onto their balance sheets should not have a major impact on their capital requirements, according to the Government Sponsored Enterprise (GSE) regulator.

The Office of Federal Housing Enterprise Oversight is working with the Financial Accounting Standards Board on changes to FAS 140, OFHEO Director James Lockhart indicated.

The two government-sponsored enterprises already have a 45-basis-point capital charge on their guaranteed MBS, he noted. Investor concerns that an accounting change would trigger a dramatic rise in their capital requirements “makes no sense,” Mr. Lockhart said.

Wall Street stock investors dumped Fannie and Freddie shares on Monday on fears that the GSE might have to raise $75 billion in new capital due to accounting changes.

In an interview on CNBC-TV, Mr. Lockhart stressed that Fannie and Freddie are adequately capitalized and have raised $20 billion in new capital over the past seven months.

Fannie Mae and Freddie Mac See Sell-Off

Shares of Fannie Mae and Freddie Mac fell sharply Monday after an analyst said they may have to raise more capital than anticipated.

Freddie Mac’s share price fell $2.59, or 18%, to close at $11.91. Fannie Mae’s shares fell $3.04, or 16%, to close at $15.74.

Analyst Bruce Harting of Lehman Brothers advised clients that a possible change in accounting rules would require the two government sponsored enterprises to shift off-balance sheet securities to their balance sheets, a move that would require them to raise additional capital to meet regulatory standards.

Separately, Reuters reported that the cost of insuring the debt of Fannie Mae and Freddie Mac rose on Monday.

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