The ABA reported that 27% of the nation's 8,500 banks held preferred shares in Fannie and Freddie in their investment portfolios. The shares are expected to be worthless.
Eight-five percent of the affected institutions were community banks -- those with less than $1 billion in assets, according to the survey. 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 ABA 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.