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Speculation on asset cap boosts Freddie, Fannie

The firms' shares climb on the belief that they might be allowed to hold more home loans.

August 07, 2007|From Times Wire Services

Shares of Fannie Mae and Freddie Mac, the two largest U.S. home-loan companies, rose on speculation that the companies' regulator may lift a cap on the amount of home loan assets they can own, helping to ease a funding crunch in the mortgage market.

Fannie Mae shares jumped $5.87, or 10%, to $62.50. Freddie Mac rose $4.30, or 7.7%, to $60.

Falling home prices and a surge in payment defaults have scared investors away from mortgage debt, including bonds and other securities backed by home loans.

Allowing the two government-sponsored companies, which are based in Washington, to hold more loans could help relieve that slump in demand.

Freddie Mac said in June that it had begun discussions with the Office of Federal Housing Enterprise Oversight about lifting a 2% limit on annual growth on its $712.1-billion portfolio. Fannie Mae reportedly also has asked to hold more mortgages. The companies declined to comment Monday.

By seeking to hold more mortgages on their balance sheets, Fannie Mae and Freddie Mac are expressing a bullish view about the soundness of mortgage debt.

In another bullish bet on the mortgage market, contrarian investor Wilbur Ross' company agreed to lend American Home Mortgage Investment Corp. $50 million to finance its operations and pay its legal fees during bankruptcy proceedings.

Ross made his fortune buying steel and textile operations when those industries were in bad shape, combining the promising pieces and resuscitating them.

Another well-known turnaround specialist, Stephen F. Cooper, was named chief restructuring officer at American Home. He has held similar jobs at onetime heavyweights Enron Corp. and Trans World Airways.

Once the 10th-largest U.S. mortgage lender, American Home filed for bankruptcy protection Monday. It suspended operations Friday, saying it lacked funding to make new loans.

Ross and Cooper couldn't be reached for comment.

Although hiring such well-known corporate saviors may be a good sign for Melville, N.Y.-based American Home's creditors, industry watchers say their involvement doesn't mean the dire situation in the mortgage market will improve soon.

"It doesn't matter how good of a person you hire, the problem is nobody wants to give the lenders any money anymore," said Axel Merk, manager of the Merk Hard Currency Fund.

The money that Ross is providing for American Home is called debtor-in-possession financing, which will make him the first creditor repaid under the company's restructuring plan.

"Given the quality of its loans and portfolio, the feeling is there could be some recovery of value," said Steven DeLaney, an analyst at JMP Securities. That's because the loans on American Home's books, primarily loans to people with good credit, still generate cash.

"Normally they could sell these loans for a profit, but all the buyers went away," he said.

Meanwhile, sub-prime lender NovaStar Financial Inc., whose stock has plunged 90% this year, plans to resume doing business with outside brokers today, four days after cutting them off.

NovaStar shares closed up 38 cents, or 5.9%, at $6.78 after being down as much as 35% earlier.

Some analysts have said they expect the Kansas City, Mo., company to fail.

More than 70 mortgage companies have halted operations or sought buyers since the start of 2006, including a dozen that have declared bankruptcy.

In less positive news, Luminent Mortgage Capital Inc., saying the market for mortgage loans and mortgage-backed securities had "seized up," Monday suspended its quarterly dividend and postponed filing its second-quarter earnings report. The San Francisco-based company said its bankers wanted more collateral to secure credit needed to run the company.

Luminent shares plunged $1.95, or 31%, to $4.38 before trading was suspended.

In the first half of 2007, Luminent sold $31 million of mortgage securities, compared with $3.1 billion a year earlier, a decline of 99%, the company said. It bought $1.26 billion of loans to be held for investment through June 30. That compared with $3.14 billion the year before.

Two other lenders -- Houston-based Aegis Mortgage Corp. and Cleveland-based National City Corp.'s wholesale home equity unit -- stopped taking applications.

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