What Fannie, Freddie Say About Banks

Fannie Mae's (FNM Quote) and Freddie Mac's (FRE Quote) first-quarter results do not bode well for a quick recovery in housing or bank balance sheets dependent on it.

When Fannie and Freddie were placed in federal conservatorship last September, their stocks fell off the radar screens of many investors as they plummeted to subterranean levels. But the companies remain twin 800-pound gorillas in the room of mortgage finance, because they hold or guarantee more than half of the country's housing assets and may still prove useful gauges for bank valuations, forecasts and risk.

Accounting rule changes have allowed companies to shift the process for assigning a value on sparsely traded assets from marking them to market prices to marking them to what financial models say they should be worth. Fannie acknowledged as much in its first-quarter report, saying that the process of valuing assets has become "more complex" and "involves a greater degree of management judgment" as the housing and credit markets have come under increasing strain.

But however Fannie and Freddie decide to value their assets influences the market, simply because of the size and scale of the companies. Their interest rates are a benchmark for the mortgage market; their moves to halt foreclosures and adjust mortgages for troubled borrowers were followed by major banks. Similarly, investors can bet that the way Fannie and Freddie value mortgage-backed securities will be reflected on other companies' books -- and may offer clues on how to value bank stocks.