US: Fannie Mae, Freddie Mac Takeovers Cost U.S. Banks Billions

About a quarter of the nation's banks lost a combined $10 billion to
$15 billion in the wake of the federal government's takeover of
mortgage giants Fannie Mae and Freddie Mac, a new industry survey found.

In the survey, the American Bankers Association reported that 27% of
the nation's 8500 banks held preferred shares in Fannie and Freddie in
their investment portfolios. The shares are expected to be worthless.

The survey found that 85% of the affected institutions were
community banks -- those with less than $1 billion in assets. Many were
located in Massachusetts, followed by Illinois, Connecticut, South
Carolina and Virginia.

Until recently, the shares were considered rock-solid investments,
similar to holdings in government securities, the association
maintains. It says the losses are galling to small bankers because they
took pains to avoid the exotic loans and loose underwriting standards
that have hobbled Wall Street titans and some huge banks. The Fannie
and Freddie preferred stock losses amount to an especially big hit,
considering that U.S. banks in the second quarter wrote off about $26
billion in loans of all kinds. From the survey, it wasn't clear whether
banks were sitting on paper losses from Fannie and Freddie or were
planning on writing down the value of their shares.

In a letter to the U.S. Treasury Department and other government
agencies, Edward L. Yingling, the association's president, said each $1
in capital supports $7.60 in lending. That ratio suggests that the
Fannie and Freddie losses could lead to a lending decline of $76
billion to $114 billion, the group said. "These community banks are the
lifeblood communities across this nation," Mr. Yingling wrote.

The banks are asking for the government to consider paying "a
reasonable level" of dividends on Fannie and Freddie preferred stock to
preserve some of the shares' value. The industry also is asking the
government to be more flexible if the losses cause some banks to fall
below federal capital requirements. The Treasury Department had no
immediate comment.

James Chessen, the association's chief economist, said the vast
majority of banks will be able to absorb the losses without violating
any regulatory rules. U.S. banks currently have capital of $1.35
trillion. The federal government currently has 117 institutions on its
problem-bank list.

It's not clear why so many banks that held the preferred stock were
in Massachusetts. Daniel Forte, president of the Massachusetts Bankers
Association, noted that the state has more than 200 banks, an unusually
high number compared with most other places that have seen more
consolidation. About 70% are small mutual savings banks. Mr. Forte said
he didn't expect Massachusetts banks, most of which exceed capital
requirements, to have trouble with "safety and soundness."

Thomas F. Lyons, president and chief executive of Fall River Five
Cents Savings Bank in Fall River, Mass., says he's going to have to
write down the bank's entire $2.5 million investment in Fannie and
Freddie preferred stock, wiping out an entire year's worth of earnings.
The mutual savings bank, which does business as BankFive, has an
investment portfolio of more than $120 million, most of it in Treasurys
and government-backed mortgage securities.

With $675 million in assets, the 153-year-old bank with 13 branches
remains well-capitalized and won't have to take any action to meet
regulatory requirements, Mr. Lyons said. But after opening five new
branches in the last four years, the bank now expects not to open any
others in the next couple of years.

"It's extremely disappointing," Mr. Lyons says of the loss. "We've
never made a subprime loan. We're a community bank. We try to do the
right thing for our customers and the community."

AMP Section Name:Financial Services, Insurance and Banking
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