Bank of China pares Freddie, Fannie stakes

NEW YORK - Fannie Mae and Freddie Mac fell yesterday after Bank of China Ltd., that nation's third-largest bank, said it pared its holdings of the mortgage-finance companies' debt as they faced growing losses and the potential need for a US government bailout.

Fannie ended a six-day, 81 percent rally, falling $1.11, or 14 percent, to $6.84. Freddie, which jumped 88 percent in the four days ended Thursday, dropped 77 cents, or 14.6 percent, to $4.51. Both are still down more than 80 percent year-to-date.

Bank of China's portfolio of the companies' debt was reduced 29 percent in the past two months, about $3.14 billion to $7.5 billion as of Aug. 25, the Beijing-based bank said in an earnings report. Holdings of mortgage-backed bonds guaranteed by Fannie and Freddie were cut 22 percent to $5.17 billion, the bank said, without elaborating.

Overseas investors are "pulling back because they're worried about the credit," Loomis Sayles & Co. vice chairman Dan Fuss said this week.

"So why not take away the worry about the credit?" said Fuss, a comanager of the $17.4 billion Loomis Sayles Bond Fund, who said the Treasury should guarantee the companies' debt, in exchange for a fee, to calm investors.

Asian investors are retreating despite Treasury Secretary Henry Paulson's pledge on July 13 to provide government support to Fannie and Freddie should their financial conditions deteriorate further. The government-sponsored enterprises, which own or guarantee at least 42 percent of the $12 trillion in US home loans, have posted $14.9 billion in net losses the past four quarters amid rising foreclosures and falling home prices.

Investors have fled the debt, common stock, and preferred shares of Fannie and Freddie amid concern the companies don't have enough capital to weather the US housing crisis and that the government will have to buy equity or debt of the companies that might wipe out existing holders.

Paulson last month won approval to pump unlimited amounts of capital into Fannie and Freddie if both he and the companies deem such action necessary to their survival and the stability of the US mortgage market. The Treasury and Fannie chief executive Daniel Mudd have said they don't foresee a need to act on that authority.

Fannie and Freddie this month paid the highest yields on record relative to Treasuries to sell debt, with US investors picking up the slack from Asian banks and funds. In Freddie's Aug. 19 sale of $3 billion of five-year reference notes, Asian investors bought 30 percent, down from 41 percent in the sale of 5-year notes in May and an average of 35 percent this year.

Congress created Fannie and Freddie to expand homeownership and provide market stability. They make money by buying mortgages from banks, funding purchases with lower-cost debt, and by guaranteeing home-loan securities.