Shares of Wachovia Corp. and Bank of America Corp. rallied on Monday, the day after the federal government announced it would take over troubled mortgage giants Fannie Mae and Freddie Mac.
Industry leaders said the deal is generally good for banks because it helps remove some of the uncertainty hanging over the nation's troubled housing market. But some banks, including Wachovia and Bank of America, are expected to take a hit on preferred shares of Fannie and Freddie that they own or have recently sold off. About half a dozen smaller Charlotte-area banks said Monday that they have little to no exposure to Fannie and Freddie stock.
Banks throughout the area, including Wachovia and Bank of America, lauded the takeover as a way to restore stability to financial markets and effect lower mortgage rates, though a few expressed concerns about the government's expanding role in the economy. Over the weekend, the government took control of the two federally chartered companies, injecting them with capital and ousting the CEOs.
Troubled Fannie and Freddie “were like a big cloud hanging over the financial markets,” said Ken Thomas, a Miami-based bank consultant and economist.
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“Anything that's good for the mortgage market is good for Bank of America and Wachovia,” he added, “and anything that's good for Bank of America and Wachovia is good for Charlotte.”
Analyst Dick Bove of Ladenburg Thalmann & Co. called Bank of America the “single largest beneficiary of these events.” That's because, with its purchase of Countrywide Financial Corp., it has the technology to pick up the business of Fannie and Freddie, he said.
Wachovia shares closed at $18.99, up 13 percent. Bank of America closed at $34.73, up 8 percent, on a day when the Dow rose about 2.5 percent. But Gerard Cassidy, an analyst at RBC Capital Markets, said it's too early to get excited, pointing out that the U.S. and global economies are still weakening. Even if the consumer real estate market improves, commercial and industrial loans and commercial real estate loans will be the “next credit shoe to drop on the banking industry,” he said.
Besides, Cassidy said, the government takeover will not encourage people to buy houses: “It has been our experience the decision to buy a house is driven by the potential homeowner's confidence about their job and income, not mortgage rates.”
Banks can sell their mortgages to Fannie and Freddie, who package them as bonds and resell them. Most banks buy these bonds, called mortgage-backed securities, though bonds should be safe under the government's plan.
However, banks that hold shares of Fannie and Freddie could encounter more problems. Banks aren't allowed to directly hold shares in most companies, but they can hold preferred shares in Fannie and Freddie and in a limited number of other financial institutions. Fannie and Freddie shares have lost almost all of their value since a year ago, and they will carry an unappealing stigma going forward.
Steve Arnall, chief financial officer at Park Sterling Bank in Charlotte, said those shares are “the real wild card” because they're almost impossible to value right now.
“That's what's scaring everybody,” he said. Park Sterling does not hold stock in Fannie or Freddie.
Bank regulators said they're concerned that “a limited number of smaller institutions” have holdings of Fannie and Freddie stock “that are significant compared to their capital.” According to a note issued two weeks ago by analysts at Keefe, Bruyette & Woods, Virginia-based Gateway Bank, which has branches in central and eastern North Carolina, had 34 percent of its tangible capital tied to Freddie and Fannie stock.
But the majority of banks, analysts say, should be able to manage their exposure to Fannie and Freddie stock, even if they have to write it all down. Officials at First Trust Bank in Charlotte, BB&T in Winston-Salem, Bank of Granite in Granite Falls, and Citizens South in Gastonia said their banks do not invest in Fannie and Freddie stock.
Nathan Batts, associate counsel at the North Carolina Bankers Association, said it's too early to determine the stock's effect on local bank holdings. But, he added, “the impact thus far appears to be limited.”
Wachovia had “modest exposure” to preferred shares of Fannie Mae and Freddie Mac but took steps early in the third quarter to eliminate these holdings, spokeswoman Christy Phillips-Brown said today.
Related losses will be reflected in third-quarter financial results, Phillips-Brown said. The bank will provide additional information when chief executive Bob Steel speaks at an investor conference today in New York, she said. The bank has said it will release third-quarter results on Oct. 22.
Bank of America holds some preferred shares of these companies and will mark them to market value in the third quarter, spokesman Scott Silvestri said. The bank hasn't disclosed the value of these holdings but it's in the millions of dollars, not billions, he said. Bank of America will release third-quarter results on Oct. 20.