Mixed Signals for Mortgage Giants

Washington Post (10/10/08) P. D2; Goldfarb, Zachary A.
Despite a June report that Fannie Mae and Freddie Mac had $9.4 billion and $2.7 billion more capital, respectively, than its regulator requires, the Federal Housing Finance Agency has deemed the companies undercapitalized due to the mortgage crisis and increasing concerns about safety and soundness. The agency indicates that intangible assets, such as tax credits, accounted for a substantial amount of the firms' capital and that capital is no longer an accurate gauge of financial health. University of California at Berkeley finance professor Dwight Jaffee says Fannie Mae and Freddie Mac were unable to generate capital by issuing new stock following comments made by Treasury Secretary Henry Paulson prior to their takeover that government intervention "would be sure to wipe out the shareholders." Jaffee says the government hopes the companies will help the housing market recover, noting that such a move "may involve taking more risks than they would ordinarily do and accepting a lower return on the assets than they normally do."