Oct. 23 (Bloomberg) -- Fannie Mae and Freddie Mac have an ``effective'' federal guarantee, not the ``full faith and credit'' of the U.S. government, Federal Housing Finance Agency Director James Lockhart said.

There are no policy changes with regard to Fannie and Freddie's debt, Lockhart told reporters, backing away from remarks about an ``explicit'' guarantee that he made in a written copy of his testimony to the Senate Banking Committee in Washington that was distributed to the media today.

``What we did say is an effective guarantee because there's $100 billion backing their equity provided by the U.S. Treasury,'' Lockhart said after the hearing. ``That does give them effectively a guarantee of the U.S. government.''

Lockhart and Treasury Secretary Henry Paulson have been trying to combat doubts by investors about the government's commitment to stand behind Fannie and Freddie's debt. The government took control of the companies last month after their loan losses ballooned and pledged to support the companies.

Jim Vogel, the head of agency debt research at FTN Financial Group in Memphis, Tennessee, publicly questioned Lockhart's published comments today, urging his clients not to trade on the news until there is a legal clarification about a guarantee.

``You must NOT believe what Lockhart says'' until seeing more evidence, Vogel wrote in a note to clients. ``Lockhart might be reflecting some pending change in outlook, but the better conclusion is he is using language that means one thing in his mind but another to traders.''

Market Confusion

Lockhart's written remarks stated that ``the conservatorship and the access to credit from the U.S. Treasury provide an explicit guarantee to existing and future debt holders of Fannie Mae and Freddie Mac.'' E-mails to FHFA spokeswomen Stefanie Mullin and Corinne Russell seeking clarification on Lockhart's testimony earlier today weren't immediately returned.

The comments briefly caused a stir in debt markets, sending Fannie and Freddie yields over benchmark rates lower before erasing most of those gains.

The difference between yields on Washington-based Fannie's five-year debt and similar-maturity Treasuries narrowed 0.7 basis point to 118.4 basis points at 1:59 p.m. in New York after reaching their highest levels on record last week, according to data complied by Bloomberg. The gap between Freddie's five-year notes and Treasuries narrowed 1 basis points to 121.8 basis points. A basis point is 0.01 percentage point.

``What needs to happen now is that the markets need to settle down and look at the various structures,'' Lockhart told reporters. ``What I had been saying is there's extremely strong support of the U.S. government behind these two companies.''

Borrowing Costs

Fannie and Freddie need low relative borrowing costs to be able to profitably buy mortgages and assist the government in lifting the housing market from its worst crisis since the Great Depression.

Yield spreads on Fannie and Freddie's five-year debt widened as much as 30 basis points, or 0.30 percentage point, last week as Paulson said the Federal Deposit Insurance Corp. will fully guarantee new bank debt, presenting investors with a potentially more attractive investment.

Though Paulson agreed to offer capital and financing to Fannie and Freddie to protect their debt and mortgage bonds from default as part of the September takeover, investors still say the federal backing is ambiguous.

Lockhart tried to reassure investors on Oct. 20, telling lenders at the Mortgage Bankers Association's annual conference in San Francisco that the government has already ``effectively'' guaranteed the debt. The financial commitment ``provided the full support of all Fannie and Freddie securities,'' Lockhart said.

While Paulson's agreement doesn't expressly give the companies' obligations the ``full-faith-and-credit'' of the U.S. government, it waives the Treasury's federal immunity from liability. That gives corporate debt and mortgage bondholders the right to sue the Treasury in the U.S. Court of Federal Claims on Fannie and Freddie's behalf in the event of a default.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: October 23, 2008 14:06 EDT