Freddie Mac and Fannie Mae are used to feeling the heat. But, just as the two US mortgage giants make their financial reporting current again, after a destabilising period of accounting problems, they are facing a triple whammy.

First, credit provisions and losses on their mortgage portfolios and the securities they guarantee, are rising sharply as the US housing mess worsens. Fannie’s credit hits went from $321m in the first quarter to $518m in the second and $1.2bn in
the third.

Second, both have significant exposure to “triple-A” securities backed by subprime mortgages. Just as such assets are terrifying investors across the financial services industry, because of the potential for huge writedowns, Freddie’s $120bn of exposure is a serious cause for concern. Fannie’s exposure is $42bn.

Third, there is the risk that both will have to raise more capital if conditions deteriorate further. Credit Suisse estimates that Freddie had $1.8bn of excess capital at the end of the last quarter. But it expects the company to announce a third-quarter loss of more than $1bn on Tuesday. Coupled with about $350m paid out in dividends, the cushion could become thin, even if the company has sold assets.

Those fears – heightened by the sheer complexity of Fannie’s and Freddie’s accounting – have helped push their shares down by 44 per cent and 40 per cent, respectively, in a matter of six weeks or so. Freddie will need to come up with some seriously reassuring words on Tuesday on credit losses, subprime exposure and capital constraints to reverse sentiment.

Meanwhile, with Freddie and Fannie still tied up in knots, there are limited incentives for regulators to rush to loosen the tight rules on their balance sheet expansion and capital ratios. Those hoping the two giants will quickly be unleashed to help increase mortgage availability and take pressure off the housing market should think again.

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