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Fannie, Freddie Ratings Face Cut as Lawmakers Siphon Funds, BofA Says

Monday, 09 January 2012 11:35 AM

The odds of credit rating downgrades on the bonds of Fannie Mae and Freddie Mac rose after lawmakers tapped the government-supported mortgage companies to pay for last month’s extension of a payroll tax cut, according to Bank of America Corp.

Investors in the so-called agency debt market should favor the bonds of other government-sponsored enterprises such as the Federal Home Loan Banks and Federal Farm Credit Banks because of the risk, Ralph Axel, a Bank of America analyst in New York, wrote in a Jan. 6 report.

Congress, to finance the two-month extension of the tax cut in December, ordered an increase in the premiums that Washington-based Fannie Mae and Freddie Mac in McLean, Virginia, charge to guarantee mortgage debt. The funds generated by the extra fees will be directed to the government for the next 10 years.

“This greatly diminishes the last remaining avenue for revenue growth, and we believe the credit rating agencies will see this as a net negative for their credit,” Axel wrote in his report. “When combined with the issue of limited capital, this significantly increases the possibility of a rating downgrade in the medium term.”

Fannie Mae and Freddie Mac, which own or guarantee about half of U.S. residential mortgages, have drawn about $153 billion in taxpayer aid since being seized in 2008. Under the terms of their bailouts, the U.S. is promising unlimited capital to the companies through this year and then as much as $274 billion in additional injections.

May Exhaust Aid

The companies, which are paying 10 percent dividends to the government on their aid, may exhaust the remaining amount within as little as seven years, assuming flat earnings, Axel wrote.

Michael Cosgrove, a spokesman for Freddie Mac, declined to comment. Katherine Constantinou, a spokeswoman for Fannie Mae, and Corinne Russell, a spokeswoman at the Federal Housing Finance Agency, which oversees the mortgage firms, didn’t immediately return telephone messages.

Fannie Mae and Freddie Mac carry top grades from Moody’s Investors Service and Fitch Ratings. Standard & Poor’s lowered the companies to AA+, from AAA, after reducing the U.S. government’s top rating by a similar amount in August.

To comply with the payroll-tax law, the FHFA directed Fannie Mae and Freddie Mac on Dec. 29 to increase their fees on new mortgages by an average of 10 basis points, or 0.1 percentage point, effective April 1.

The tax-cut extension legislation also mandated further increases through next year to make the charges “consistent with private-market pricing,” Axel wrote in the report. That money also will be owed to the government, he said.

Fannie, Freddie Spreads

“The final price for the deal was not well publicized and was actually very high for Fannie and Freddie and very rewarding to GSE critics among both parties,” he wrote. “Not only does this result reveal the political significance of the GSE issue, but it also reveals how difficult it is for politicians to support Fannie and Freddie today.”

The difference between yields on the benchmark notes of Fannie Mae and Freddie Mac and similar-maturity Treasuries has widened to 30 basis points from last year’s low of 12 basis points in April, according to Bank of America Merrill Lynch index data. Spreads on a broader range of agency debt average 35 basis points, up from 14 basis points in April, index data show.

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Monday, 09 January 2012 11:35 AM
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