Citigroup sees subprime losses at Fannie, Freddie

NEW YORK (Reuters) - Price deterioration in subprime mortgages has resulted in approximately $4.7 billion of unrealized losses for mortgage finance giants Fannie Mae and Freddie Mac, according to report published by Citigroup.

That is about 6 percent of the equity capital of the two government-sponsored enterprises.

Citigroup, in the report published on Thursday, estimates that the two companies' retained portfolios contain $182 billion of subprime bonds, almost all of which are rated triple-A, based on public disclosure by Fannie Mae <FNM.N> and Freddie Mac <FRE.N> and their regulator, the Office of Federal Housing Enterprise Oversight.

Citigroup also said in its report the triple-A rated securities have significant credit enhancement that serves to protect the securities against losses even in extreme scenarios.

Fannie Mae and Freddie Mac have exposure to over $3 trillion in mortgages due to their guarantee portfolios and $1.4 trillion in their retained portfolios, but the vast majority of this exposure is prime mortgages, Citigroup said.

Citigroup said delinquencies in Fannie Mae's and Freddie Mac's guarantee portfolios have not increased so far this year, supporting the two GSEs' assertion that their portfolios are predominantly prime mortgage portfolios.

"Given the long investment horizons and stable funding sources available to Fannie and Freddie, there is little reason to expect that they will realize these losses in the near term," Citigroup said.

On a held-to-maturity basis, the only write-down would occur from permanent impairment as a result of realized credit losses, the company said.

Citigroup said it expects these impairment-related losses to be considerably smaller than its topline estimate of $4.7 billion in mark-to-market losses.

"As to the market prices of these AAA holdings, we have not seen any material markdown of value," said Freddie Mac spokesman Michael Cosgrove.

"We possess current data on the valuations of these assets based on independent price quotations obtained from third party sources, such as pricing services and dealer marks," he said.

Officials of Fannie Mae were not immediately available for comment.

Fannie Mae on Friday said none of the subprime mortgage-backed bonds it holds has been cut from top-tier credit ratings.

Fannie Mae said its non-agency securities totaled $122.8 billion at the end of the second quarter, which included $47.2 billion backed by subprime loans. The overwhelming amount of those loans, at $46.9 billion, were rated triple-A or the equivalent by at least two nationally recognized rating organizations, the company said in its June monthly summary.

None of the $47.2 billion subprime mortgage-backed securities has been downgraded, Fannie Mae said.

GSE credit default spreads have been widening recently, with some pointing to fears over Fannie Mae's and Freddie mac's subprime holdings as the reason. Others say the widening is due to concerns that Fannie and Freddie may build their portfolios given the weakness in the market.

Citigroup said the widening of GSE credit default spreads is overdone and recommends that investors sell protection on Fannie Mae and Freddie Mac senior debt.

Fannie Mae shares on Friday were down 1.62 dollar, or 2.67 percent, at $59.98 on the New York Stock Exchange.

Freddie Mac shares on Friday were down 0.99 cents, or 1.67 percent, at $58.40 on the New York Stock Exchange.