Magazine article American Banker

Orange County Fallout Hurts Fannie and Freddie

Magazine article American Banker

Orange County Fallout Hurts Fannie and Freddie

Article excerpt

The stocks of Fannie Mae and Freddie Mac have been dealt another blow - this time by the Orange County bankruptcy. As a result, at least one analyst is now rating the stocks as "high risk."

The bankruptcy caused the spreads between agency debt and Treasury debt to widen, according to Smith Barney analyst Thomas O'Donnell. Spreads widened as the market anticipated that $10 to $15 billion of agency debt controlled by Orange County would soon be up for sale, Mr. O'Donnell said.

The agency debt, primarily issued by Fannie Mae and the Federal Home Loan Banks, was offered as collateral by Orange County to several investment banks for repurchase loans. The investment banks called the loans last week.

The spreads between Fannie and Freddie debt, which have already been unusually wide this year, widened further by 0.1 to 0.15%, Mr. O'Donnell said in a report last week.

Stocks of both agencies fell after the bankruptcy announcement last Wednesday. Stock of Fannie Mae - formally the Federal National Mortgage Association - fell by about 2% to $70.625. That of Freddie Mac - the Federal Home Loan Mortgage Corp., fell about 2.7%, to $49.

Mr. O'Donnell attributed the fall to moves in the agency debt market and said he believed Fannie and Freddie may be forced to slow the growth of their portfolios if the cost of debt goes up.

He warned that the stocks would continue to be plagued by "near- term volatility and weakness." He is now rating the stocks as "high risk. …

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