On the path to profit -- or nationalization?

Fannie Mae and Freddie Mac have the capital they need to not only ride out the housing downturn, but underwrite a lot of loans this year that should prove to be very profitable in the long run. That, according to James Lockhart, head of the Office of Federal Housing Enterprise Oversight (OFHEO), which oversees the safety and soundness of both companies.

Investors were hanging on Lockhart's every word today, because of a Lehman Brothers report that suggested proposed changes to an accounting rule by the Financial Accounting Standards Board might force Fannie and Freddie to raise $75 billion in capital.

Investors panicked Monday, with shares of Fannie and Freddie tanking on fears that the companies would have to issue more common stock to raise capital, diluting the value of existing shares. The stocks recovered some ground today after Lockhart said the new accounting rule won't force Fannie and Freddie to raise more capital.

In an interview with CNBC, Lockhart said Fannie and Freddie "are classified as adequately capitalized," having raised "significant capital" to cover recent losses. The capital already raised should "allow them to ride out the problems of the past years and underwrite this year what should be a very profitable book of business." Fannie has raised $15 billion, and OFHEO expects Freddie will have $5.5 billion it's agreed to raise in the bank by the end of the summer, Lockhart said.

In March, OFHEO relaxed strict capital requirements that were put in place in 2004 in the aftermath of the accounting and management scandals. The relaxed capital requirements -- although still tougher than those in place before the scandal -- gave Fannie and Freddie additional leeway to buy up $200 billion in mortgages and mortgage-backed securities. OFHEO said the companies had made progress in strengthening internal controls, and promised in May to continue easing capital requirements as the companies raised money to offset losses.

The Street's Marek Fuchs today lambasted the media coverage that spurred the run on Fannie and Freddie's shares, saying the Lehman Brothers report was largely positive and was mischaracterized by the media. The very real problems at IndyMac added to the confusion, he said. But Kevin Depew, executive editor of Minyanville.com, thinks that the "nationalization" of Fannie and Freddie is inevitable.

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