8/22T11:22 News

Fannie, Freddie preferreds batter Sovereign, Midwest - Bloomberg.com
Bloomberg.com reports Midwest Bank Holdings (MBHI) Chief Investment Officer Don Wiest is wagering U.S. Treasury Secretary Henry Paulson will rescue him from a failing $67 mln stake in Fannie Mae (FNM) and Freddie Mac (FRE). Midwest and banks from Sovereign Bancorp (SOV) to Frontier Financial (FTBK), own preferred shares in the beleaguered mortgage-finance companies that have lost more than half their $35 billion value since June 30. Concern that Paulson may step in with a rescue plan that would wipe them out along with common stock investors has sent the securities tumbling. "I guess we are betting on Paulson,'' Wiest said. "We have to believe that his plan carries the day somehow.'' Midwest has $67.5 mln, or as much as 23% of its risk-weighted assets tied up in Fannie and Freddie. Small, regional banks may have the most to lose from the stumbles in Fannie and Freddie, and Paulson may risk bank failures unless he protects preferred stockholders, said Ira Jersey, an interest-rate strategist at Credit Suisse. The impact on the preferred holders "may be an important driver'' in Paulson's decisions, Jersey said. "Any wipeout of the preferreds could have implications for the capital of the greater financial system and these regional banks that might have reasonably precarious capital situations,'' Jersey said. "You don't want to make that worse if you're the government.'' CATY has $30 mln in Fannie and Freddie securities. SOV has a $632 mln stake while Frontier owns $5 mln in FRE and FNM securities.

Moody's cuts Fannie Mae's and Freddie Mac's preferred stock ratings; affirms Aaa senior debt
Moody's Investors Service downgraded the preferred stock ratings of the FNM and FRE to Baa3 from A1 and the Bank Financial Strength Ratings (BFSR) to D+ from B-. The preferred stock ratings and BFSRs remain on review for possible further downgrade. Fannie Mae's and Freddie Mac's Aaa senior long-term debt and Prime-1 short-term debt ratings were affirmed with stable outlooks. The cos' Aa2 subordinated debt ratings were affirmed, but the outlook was changed to negative from stable. Moody's said the downgrade of the BFSRs reflects Moody's view that Fannie Mae's and Freddie Mac's financial flexibility to manage potential volatility in its mortgage risk exposures is constricted. In particular, given recent market movement, Moody's believes these cos currently have limited access to common and preferred equity capital at economically attractive terms. Moody's added that these GSE's more limited financial flexibility also restricts their ability to pursue their public policy mission of providing liquidity, stability and affordability to the US housing market. Fannie Mae and Freddie Mac currently make up approximately 75% of the mortgage market in the US. A reduction in the capacity of these cos to support the US mortgage market could have significant repercussions for the US economy. In an effort to thwart broader negative economic effects, Moody's believes the likelihood of direct support from the United States Treasury has increased.

Analysts warn on bank exposure to Fannie, Freddie junior debt - DJ
DJ reports common shareholders of Fannie Mae (FNM) and Freddie Mac (FRE) may not be the only ones who suffer if the U.S. government has to step in to rescue the companies. Banks that hold their so-called junior debt may also take major earnings hits under a bailout, analysts say. Only a handful of banks have voluntarily disclosed how much of their exposure to the two troubled government-sponsored enterprises, or GSEs, is in preferred stock or subordinated debt. Those securities face a higher risk of being wiped out under a bailout than senior debt or mortgage-backed securities. Analysts at CreditSights estimated there was about $50 billion in vulnerable GSE junior securities outstanding, with banks likely holding a large portion of that amount. Most bank holdings of Fannie and Freddie securities are in senior debt or mortgage-backed securities, which most analysts say are virtually certain to be protected under any bailout scenario. But support for the junior securities is less certain, and they could emerge as yet another burden to an industry already saddled with problems. For example, if Sovereign Bancorp (SOV) had to write down its entire portfolio of GSE junior securities, the hit would amount to about four quarters of the bank's earnings, the CreditSights analysts said... Other banks that disclosed their GSE junior security holdings appeared to have a manageable level of exposure, CreditSights said. MTB said during its second-quarter conference call it had $190 million in exposure to Fannie and Freddie's unsecured debt, and $162 million of their preferred stock... USB had $97 million in GSE preferred stock, an exposure less than one-fourth of quarterly earnings, while FITB had $68 million in preferreds, far less than one-fourth of quarterly earnings, the analysts said. BBT specifically said it didn't hold any of the GSE's junior securities. WFC didn't directly disclose how much GSE junior securities it held, but in its second-quarter report it said it had preferred securities from financial services companies of $2.54 billion at June 30, which may include debt from the GSEs.

More proof that home equity paper is worthless
The FDIC plan to modify some first lien mortgages in the IndyMac takeover will further soldify the premise that most home equity paper is worthless. As per the article, if the FDIC plan is implemented, the first lien mortgages will be reduced to an affordibility level for the borrower, and this would effectively wipe out any residual equity value that theoretically secures 2nd lien loans:
"We’re talking Alt-A here, which means we’re also talking second liens," said the source. The FDIC statement on loan modifications at IndyMac didn’t address second lien positions, which would likely be wiped out in the event of a borrower refinancing."
Interestingly, this FDIC plan is limited in scope, as it will be utilized on IndyMac's whole loan portfolio, which the bank owns. The bulk of IndyMac's loans, and for the industry as a whole, has been securitized into asset-back pools. These loans will continue to rot away as strapped borrowers either get foreclosed or turn their keys into the bank and walk away.
As for home equity paper being worthless, keep in mind that many big banks which are far larger than IndyMac, like Wamu and Wachovia and Wells Fargo, have home equity loan balances in some cases twice as large as the book