Officials reassure solvency of Fannie, Freddie as stocks plunge

BySue Kirchhoff and John Waggoner, USA TODAY

WASHINGTON -- Top federal officials Thursday emphasized that mortgage giants Fannie Mae fnm and Freddie Mac fre were in no imminent danger of default, even while saying financial markets remained under considerable strain and calling on Congress to beef up regulation.

"Fannie Mae and Freddie Mac play an important role in our housing markets today and need to continue to play an important role in the future," Secretary Treasury Henry Paulson told the House Financial Services Committee at a hearing on financial regulation. "Their regulator has made clear that they are adequately capitalized."

Paulson's comments came on a day when the stock of Fannie and Freddie, government sponsored enterprises that buy mortgages and repackage them into bonds, continued to sink.

Freddie shares plunged $2.26, or 22.0%, to $8.00; Fannie's dropped $2.11, or 13.8%, to $13.20.

Thursday, former St. Louis Federal Reserve Bank President William Poole told Bloomberg News the mortgage giants were technically insolvent, given recent large financial losses.

Freddie Mac rebutted Poole in a statement: "As its regulator has noted, Freddie Mac has maintained the highest possible capital rating. The company continues to hold a surplus above its regulatory requirement that will enable it to continue to support the nation's housing markets."

Likewise, Fannie Mae managing director Brian Faith defended the adequacy of the company's capital, citing recent reports from the company's regulator, the Office of Federal Housing Enterprise Oversight. Faith said Fannie's core capital on March 31 totaled $42.7 billion, or $11.3 billion more than its minimum requirement.

"We are managing our business and maintaining a capital position that will allow us to fulfill our congressionally chartered mission now and in the future," he said

In addition, The Wall Street Journal, citing unnamed sources, said federal officials have been discussing options if Fannie and Freddie get into deeper trouble.

Federal Reserve Chairman Ben Bernanke, who testified with Paulson at the House hearing, also tried to ease fears during an appearance on Capitol Hill.

Bernanke told the panel Fannie and Freddie were well capitalized "in a regulatory sense," but added that "we've called upon all financial institutions to expand their capital base ... I would include (Fannie and Freddie) in that broad call."

Asked if the federal government had adequate authority to step in if Fannie and Freddie were in immediate danger of failure, Paulson said "I don't think we should be speculating or talking about 'what ifs' with any particular institution," adding that the tool he wants is "reform legislation that will inject confidence into the marketplace."

The Fed and Treasury for years have pushed Congress to pass legislation creating a stronger regulator for Fannie and Freddie. The House recently approved a bill and the Senate on Thursday moved closer to a final vote on companion legislation.

The House hearing was scheduled to examine how to beef up federal oversight of financial markets, given the ongoing credit problems and the Fed's March decision to provide a $30 billion loan for the sale of investment bank Bear Stearns to JPMorgan Chase. Committee Chair Barney Frank, D-Mass., said there is an emerging consensus that the Fed will have a broader role. It could take months for Congress to act.

In a speech earlier this week, Bernanke also said the Fed might extend the life of a special facility it set up in March to lend to investment banks. The Fed can extend the lending facility only if it determined there unusual and pressing circumstances in the marketplace.

Bernanke said the Fed does not want to evoke a "severe reaction in the market" by ending the lending facility too early. "The markets remain quite strained," Bernanke said. " I don't think that removing it at this point would be a good idea."

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