June 5 (Bloomberg) -- Fannie Mae and Freddie Mac, the once- derided white elephants of the mortgage market, are benefiting from the subprime lending debacle and trampling just about anything in their way.

The government-chartered companies, the biggest source of money for Americans buying houses, accounted for 46.9 percent of all mortgage bonds sold through April, newsletter Inside Mortgage Finance says. Their share rose from a record low 37.3 percent in last year's second quarter.

The biggest slump in U.S. home prices since 1991 is reviving Washington-based Fannie Mae and McLean, Virginia-based Freddie Mac, after $11.3 billion of accounting errors led to the ousters of their chief executive officers and the threat of tighter government regulation. Now, the companies are getting praised in Congress after promising to spend at least $20 billion to keep the mortgage market afloat by purchasing loans made to people with poor credit histories or high debt burdens.

``The political tide is definitely running in their favor,'' said David Dreman, who oversees $22 billion, including 12.8 million Freddie Mac shares, at Dreman Value Management in Jersey City, New Jersey. The companies ``are re-establishing their credibility,'' he said.

Fannie Mae and Freddie Mac, which together own or guarantee about $4.5 trillion of residential mortgage assets, are offering the capital after foreclosures increased 62 percent in April from a year earlier, according to a May 15 report by Irvine, California-based RealtyTrac Inc., which sells information on defaults.

Home Prices Fall

Home prices dropped last quarter for the first time in almost 16 years, according to the S&P/Case-Shiller index. More than 50 mortgage companies have halted operations, gone bankrupt or sought buyers since the start of 2006.

While subprime mortgages got battered, the fixed-rate loans Fannie Mae and Freddie Mac prefer to package into bonds and guarantee increased to 82 percent of new mortgages from 63 percent in mid-2005. The amount of mortgage bonds sold or guaranteed by the companies rose by a net $93 billion this year, up 38 percent from the same period in 2006, Credit Suisse Group estimates.

Fannie Mae is ``confident'' about increasing its share of bond sales, Thomas Lund, senior vice president in charge of single-family mortgages, said in an interview last month.

Shareholders are reaping the benefits. Fannie Mae rose 19 percent since the end of March and Freddie Mac gained 14 percent, beating the 8.1 percent increase in the Standard & Poor's 500 Index.

New Deal Creation

``The fact they did not get mired in the subprime market and are now able to pick up the pieces is positive for Fannie and Freddie,'' said Marshall Front, whose Chicago-based money management firm, Front Barnett Associates, owns 337,000 Fannie Mae shares. The subprime turmoil ``is one of the few opportunities in recent memory when they have been able to demonstrate to the media and to members of Congress that they are going to help with a problem as opposed to being the cause of a problem,'' he said in an interview yesterday.

Fannie Mae was created in 1938 as part of President Franklin D. Roosevelt's New Deal. The government took Fannie Mae public in 1968 and Congress created Freddie Mac in 1970.

The companies buy mortgages from financial institutions, providing money for new loans. They profit by holding mortgages and mortgage bonds as investments, and by charging a fee to guarantee securities backed by packages of home loans.

Bigger Than Treasuries

Fannie Mae and Freddie Mac finance about 40 percent of the $10.9 trillion of U.S. residential mortgages. More than $6 trillion of mortgage bonds are outstanding, making it the largest debt market in the world and about 50 percent more than the amount of Treasuries. The prices investors pay for the bonds help determine the rates lenders charge consumers.

The companies' shares also got a boost after Fannie Mae and Freddie Mac told Congress on April 18 they had committed to provide money to subprime lenders as home prices weakened. The Joint Center for Housing Studies at Harvard University in Cambridge, Massachusetts, estimates residential real estate accounts for about 23 percent of the economy.

A month later, the House of Representatives watered down legislation creating a new regulator for the companies. The bill only allows the government to force Fannie Mae and Freddie Mac to sell investments if they threaten their own financial health. Previous drafts would have given an overseer more authority.

Congress Changes Tone

``It's the existence of Fannie and Freddie's portfolios that is helping'' sustain the flow of mortgage finance, Representative Barney Frank, a Massachusetts Democrat and chairman of the House Financial Services Committee, said in an interview last month.

Richard Baker, a Louisiana Republican on the House Financial Services Committee who sought tighter regulation of the companies for seven years, was one of 90 Republicans who voted for the legislation drawn up by Democrats.

``It's been worth it'' for Fannie Mae and Freddie Mac to tell Congress they'll work to avert defaults, Baker said in an interview last month.

Shares of Fannie Mae closed at $64.61 yesterday on the New York Stock Exchange, 26 percent below the record $87.81 on Dec. 18, 2000. Freddie Mac finished at $67.20, 9.4 percent less than its high on Dec. 31, 2004.

Morgan Stanley analyst Kenneth Posner in New York raised his 12-month target price for Fannie Mae shares to $81 from $69 while maintaining an ``overweight/attractive'' rating on May 28.

`Bid for Resurrection'

Fannie Mae and Freddie Mac may never dominate the mortgage bond market as they did as recently as 2003, when the companies and government-owned Ginnie Mae accounted for 85 percent of all sales, said Joseph Mason, a finance professor at Drexel University in Philadelphia who works with the Philadelphia Federal Reserve Bank and Federal Deposit Insurance Corp.

The companies face more competitors who finance riskier loans, he said. Fannie Mae and Freddie Mac gained market share as sales of bonds backed by subprime loans fell 22 percent in the first four months of the year to $88 billion, according to Inside Mortgage Finance.

``I can't say this is a final bid for resurrection,'' Mason said.

Fannie Mae and Freddie Mac lost market share starting in 2002 as the housing boom began and the companies became mired in accounting scandals.

Leland Brendsel, Freddie Mac's CEO, left in June 2003 and Franklin Raines, the CEO of Fannie Mae, stepped down in December 2004 after disclosing bookkeeping errors that included improper reserves to smooth earnings.

Housing Boom

The median price of U.S. houses jumped 56 percent from 2001 to 2006, according to the National Association of Realtors in Chicago. As values increased, mortgage companies encouraged borrowers to buy, offering them teaser rates on loans that reset with higher payments after a number of years.

Adjustable rate mortgages grew to 30 percent of new loans in 2005 from 17 percent in 2002, according to data compiled by the Mortgage Bankers Association in Washington. More than 80 percent of the loans backing bonds sold by Fannie Mae and Freddie Mac have fixed rates.

Non-agency bonds from Countrywide Financial Corp., based in Calabasas, California, Washington Mutual Inc., in Seattle, Bear Stearns Cos. of New York and dozens of other financial institutions almost quadrupled to $1.8 trillion since 2001, according to the Federal Reserve. Subprime mortgages accounted for 39 percent of the non-agency bonds last year, according to Inside Mortgage Finance.

Alt A Mortgages

Fannie Mae and Freddie Mac's competitors are scaling back amid the highest rate of late payments on subprime loans since 1997 and a doubling of delinquencies and defaults on so-called Alt A mortgages, according to analysts at firms including New York-based Citigroup Inc. Alt A mortgages are made to borrowers with good credit records who decline to give information such as proof of income or assets. Fannie Mae and Freddie Mac generally avoid the loans.

``More of the supply of the mortgage product being produced is more of the type that Fannie Mae and Freddie Mac will consider,'' said Douglas Dachille, CEO of New York-based First Principles Capital Management LLC, which oversees $3.5 billion for institutional investors.

Some home lenders are selling more mortgages to Fannie Mae and Freddie Mac even when they pay less than other underwriters, said Brian Simon, a senior vice president at Freedom Mortgage Corp. in Mount Laurel, New Jersey. Fannie Mae and Freddie Mac don't normally include clauses in sales contracts that force lenders to buy back loans should borrowers miss one of their first few payments, he said.

`Perfect Storm'

Repurchase demands helped drive New Century Financial Corp., Ownit Mortgage Solutions Inc., ResMae Mortgage Corp., Mortgage Lenders Network USA Inc., People's Choice Financial Corp. and SouthStar Funding LLC into insolvency.

Freedom Mortgage cut sales to Wall Street firms and larger mortgage companies by more than 75 percent, while increasing them to Fannie Mae or Freddie Mac, Simon said.

``We had a perfect storm against these people for three years and now the storm seems to be abating and the sun is rising,'' said Front at Front Barnett. ``People will look back and say, `My God, look how well they did.'''

Richard Syron, a former president of the Federal Reserve Bank of Boston, became Freddie Mac's chief executive in December 2003 and Daniel Mudd took over from Raines a year later.

Political Donations

They have appeared three times before the House Financial Services Committee and members of the Senate Banking Committee since March 15 to discuss their mission to stabilize the mortgage market in times of turmoil. They also said stricter regulation may backfire by impeding their rescue efforts.

The companies' political action committees gave $350,200 in donations during the first three months of 2007, or 19 percent of their $1.8 million in outlays during the previous two years, according to PoliticalMoneyLine, a Washington-based organization that tracks campaign finance.

The spotlight on subprime loans ``gives us a chance to strut our stuff,'' Syron said at a May 14 conference in New York sponsored by Zurich-based UBS AG, the world's biggest money manager for the wealthy.

To contact the reporter on this story: Jody Shenn in New York at jshenn@bloomberg.net; James Tyson in Washington at jtyson@bloomberg.net

Last Updated: June 5, 2007 00:13 EDT