Bank Profits Hurt by Fannie and Freddie Securities

NEW YORK (Reuters) - Securities issued by U.S. housing finance companies Fannie Mae and Freddie Mac are touted as a safe bet for investors, but some U.S. banks may be thinking otherwise.
Accounting woes and management changes at both housing finance companies have eroded the value of their preferred securities held by many banks.
Banks buy a variety of securities issued by both companies, including agency bonds and preferred securities. Preferred securities attract bank managers because of tax advantages that increase returns, and they were considered a safe investment.
Furthermore, Fannie and Freddie preferreds are the only ones of that type of security that many banks can buy.
But now investors have become more circumspect.
"(With) Fannie or Freddie you have to understand credit risks today that you would not have considered five years ago," said Charles Viater, chief executive officer of MFB Corp.
MFB, based in Mishawaka, Indiana, recorded a non-cash impairment charge because of a drop in the value of Fannie and Freddie floating rate preferred securities.
MFB said accounting problems at the agencies hurt these securities so it conservatively interpreted current accounting guidance by recording the drop in value as "other than temporary."
The Peoples Holding Co., based in Tupelo, Mississippi, also followed the same strategy and posted lower earnings, citing, in part, an impairment of Fannie and Freddie securities that cost 7 cents a share.
Meanwhile, Astoria Financial Corp. recorded a $9.6 million charge related to losses in Freddie preferreds, and Sovereign Bancorp Inc. took a $21 million after-tax charge for losses in Fannie and Freddie preferreds.
Freddie and Fannie are congressionally chartered corporations that help banks raise money on Wall Street for home loans. Both have come under increased scrutiny and criticism for accounting practices that brought about management changes and restatements of earnings.