Barclays: Treasury Should Boost Fannie Lifeline to $300 Billion

The U.S. Treasury may need to increase its lifeline to Fannie Mae beyond the total of up to $200 billion already made available if the economy deteriorates further next year, analysts at Barclays Capital said in a report Friday.

The U.S. government took control of Fannie and its rival Freddie Mac, the main providers of funding for home mortgages, in September 2008 through a legal process known as conservatorship amid huge losses from defaults. The two companies own or guarantee around half of the U.S. residential mortgages outstanding.

By year end, Fannie and Freddie will have received a total of $112 billion of capital from the government. To keep the companies afloat, the U.S. Treasury agreed in 2008 to purchase up to $100 billion of preferred stock in each company. In February 2009, the Treasury doubled that support to as much as $200 billion in each company. The Congressional Budget Office in March said the total cost of conservatorship to taxpayers could reach $389 billion.

The Treasury’s authority to expand those purchases without congressional approval expires at year end. The companies would have to be placed into receivership if they ran out of money and Congress didn’t authorize increased capital injections. Barclays analysts on Friday recommended that Treasury increase Fannie’s lifeline to $300 billion.

Barclays estimates that Fannie and Freddie will require around $130 billion and $100 billion in Treasury money, respectively, under a base-case scenario. But under a more stressful scenario, such as a double-dip recession, Fannie’s losses could rise to $180 billion, a level that would make the current backstop “too close for comfort.” A separate report earlier this year by analysts at Keefe, Bruyette & Woods said that Fannie could require $279 billion in Treasury backing under a worst-case scenario.

The Obama administration has said it will release early next year its recommendations on how to remake America’s $11 trillion mortgage market, and interest groups and Wall Street analysts have published their own proposals in recent weeks. The Barclays report said the debate over the future of Fannie and Freddie could take a decade or more to resolve.

While no clear consensus over the future of the companies has  emerged, a consensus over what not to do may be taking shape. Options for the future of the companies fall broadly into three categories: nationalization, privatization, and some type of hybrid public-private model.

Rising losses at the Federal Housing Administration, for example, could make nationalization less attractive, said Andrew Davidson, a mortgage-industry consultant. At the same time, the dearth of private investment in mortgages in the aftermath of last fall’s financial panic suggests that “at least under the most stressed conditions, some form of government backstop may be necessary to ensure continued securitization of mortgages,” said Federal Reserve Governor Elizabeth Duke in a speech Thursday.

But Ms. Duke also warned that restarting the government-run finance companies “in their old forms would do nothing but ask for a repeat of recent history.” Public-private options for the companies including creating a public-utility model or a cooperative owned by lending institutions.

So far, the Obama administration has been in no hurry to remake the companies as it works instead to stabilize the housing market. It has used the companies to help modify loans of troubled borrowers, and the Federal Reserve has helped drive mortgage rates to near-record lows this year by committing to buy up to $1.25 trillion in debt and mortgage-backed securities issued by Fannie and Freddie through next March.

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