Fannie Mae, Freddie Mac Report 10-Year High Profits

Washington, D.C. (AHN) - Major mortgage lenders Fannie Mae and Freddie Mac reported Tuesday large profits establishing a 10-year record due to its use of the coupon mortgage bonds.

The mortgage bonds held by the two firms has a 40 basis points yield, higher than what it pay to borrow by selling benchmark bonds. The difference is over 20 basis points, only twice achieved in the past decade, in 1998 and 2003.

With the gap Fannie Mae and Freddie Mac could offset some of the mortgage losses it incurred in the past and will ease pressure on Treasury Secretary Henry Paulson to offer a bailout program.

Because of this development, Fannie's stock went up for the fourth consecutive day by $0.43 or 8.3 percent to $5.62 at the New York Stock Exchange, Freddie enjoyed an even larger gain of $0.68 or 20.6 percent as its shares rose to $3.97.

The shares of the two mortgage lenders dipped to almost 20-year lows last week over questions if it has sufficient capital to triumph over the worst housing slump experience by the country. Compared to 2007, shares of Fannie Mae and Freddie Mac had gone down by over 85 percent.

According to Citigroup analysts during a Tuesday conference call, Freddie will have $12.7 billion excess capital over the minimum requirement, while Fannie will have $20.3 billion.

Citigroup analyst Bradley Ball told the Washington Post both companies "can absorb fairly significant credit costs between now and the end of this year without having to add additional capital."

Even if the credit markets will decline over Citigroup forecasts, "There's a pretty good chance they will have to tap the market for additional capital, if not end of this year, sometime in 2009," Ball said.

Meanwhile, Standard and Poor's reduced the preferred stock ratings of Fannie and Freddie three grades to the lowest investment-quality ranking. The rating were downgraded to BBB- from A-, while its subordinated debt was reduced to BBB+ from A-.