Fannie Mae

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Fannie Mae Swings to Loss, Will Seek Fresh $6 Billion
Regulators Trim Amount of Capital Mortgage Giant Must Keep on Hand
By DONNA KARDOSMay 6, 2008 9:14 a.m.
http://online.wsj.com/article/SB121007526280870313.html?mod=hps_us_whats_news
U.S. regulators lifted a consent order on Fannie Mae and lowered the amount of capital it must hold, even as the government-sponsored mortgage finance giant swung to a $2.19 billion first-quarter loss amid another round of hefty write-downs and credit costs.
Fannie, meanwhile, said it will raise another $6 billion in capital and cut its dividend to free up funds for further growth and announced a series of new measures to support the mortgage market.
Taken together, the announcements are testament to the integral role the government sees Fannie playing in its multipronged plan to bolster the housing market. They also highlight the mortgage giant's efforts to simultaneously shore up its balance sheet while taking on more risk. As such, they could provide further ammunition for critics who already fear Fannie Mae is overextended.
"As the market correction continues, we will continue to play both offense and defense," Fannie's chief executive, Daniel Mudd, said in a release.
Shares of Fannie fell 6.7% to $26.41 in premarket trading.
The largest buyer of U.S. home loans reported a net loss of $2.19 billion, or $2.57 a share, compared with prior-year net income of $961 million, or 85 cents a share. The loss came even as Fannie continued to expand its business. Revenue climbed 38% to $3.78 billion, driven by increases in guaranty-fee and net-interest income, and Fannie's share of the market for new single-family mortgage related securities topped 50%.
The mean estimates of analysts polled by Thomson Reuters were for a loss of 81 cents a share on $1.26 billion in revenue.
Results were hurt by $4.4 billion in losses on derivatives and trading securities, as well as $3.2 billion in credit-related expenses, as declining home prices produced greater losses.
Those write-downs don't tell the whole story. Fannie also said the fair value of its net assets plunged by $23.6 billion over the three-month period to $12.2 billion on March 31. Those losses didn't hurt the company's profits, however, because the company changed its accounting practices to recognize the losses only when they are realized.
Looking forward, Fannie said it expects "severe weakness in the housing market to continue in 2008," with the weakness projected to "lead to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in U.S. residential mortgage debt outstanding."
Home prices are declining faster than expected and should now fall by 7-9% this year, and credit losses will continue to rise through 2009, Fannie said.
The results could lead critics to question the decision announced Tuesday by Fannie's regulator, the Office of Federal Housing Enterprise Oversight, to cut the surplus capital Fannie must hold by 5 percentage points to 15%, with another 5-point cut in September, as long as there is "no material adverse change" to the company's regulatory compliance.
Fannie said Tuesday it will try to help cushion the mortgage market downturn by refinancing borrowers with Fannie owned loans that owe more than the value of their homes, working with state agencies to provide $10 billion in financing for first time buyers, helping families in hard-hit communities live in foreclosed properties on a rent to own basis and pricing some jumbo loans in line with regular loans.
Fannie and sister company Freddie Mac buy more than 75% of all home loans originated in the U.S. and repackage them into bonds they guarantee, freeing up funds for further mortgage lending. Amid the current housing-market conditions and credit-market turmoil, they've both been badly battered.
In late February, Moody's Investors Service warned it may lower its assessment of Fannie's intrinsic financial strength, saying the company faces heavy losses in the year ahead that could eat a thinning capital cushion. Meanwhile, analysts have said that if markets continue to deteriorate, Fannie and Freddie may need to raise capital by selling shares to investors overseas and at home.
Fannie's quarterly dividend will fall beginning in the third quarter to 25 cents a share. The company will save about $390 million as a result.
Write to Donna Kardos at donna.kardos@dowjones.com