Fannie Has $3.55 Billion Fourth-Quarter Loss Amid Housing Slump
2008-02-27 08:14 (New York)
By James Tyson
Feb. 27 (Bloomberg) -- Fannie Mae, the largest source of
money for U.S. home loans, posted a $3.55 billion loss in the
fourth quarter as the failure of homeowners to keep up with their
mortgage payments dragged down the value of the company's assets.
The net loss was $3.80 share, compared with profit of $604
million, or 49 cents, a year earlier, Washington-based Fannie Mae
said in a statement today. Excluding some items, the per-share
loss was $3.79, compared with the $1.20 average estimate of 12
analysts in a Bloomberg survey.
An almost doubling in home foreclosures and an economy
teetering near recession are reducing the value of the
$2.3 trillion of mortgages the government-chartered company owns
or guarantees. Chief Executive Officer Daniel Mudd said last
month that Fannie Mae faces a ``tough year.'' The slump may force
the company, which sold $7 billion in preferred stock in
December, to raise more money, said Paul Miller, an analyst at
Friedman Billings Ramsey & Co. in Arlington, Virginia.
Fannie Mae ``will continue to have trouble with both credit
losses and capital levels,'' said Miller, who on Feb. 25
downgraded the stock to ``underperform.'' Credit impairments will
exceed company estimates and ``the Street's expectations.''
The company, which accounts for at least one in five home
loans, has lost more than half its market value in the past year
as the housing slump deepened. Analysts at Goldman Sachs Group
Inc. and Merrill Lynch & Co. cut their recommendations to
``sell'' in the past week on concern that falling home prices
will restrict earnings.
Loan Losses
Fannie Mae fell $1.30, or 4.6 percent, to $26.97 yesterday
in New York Stock Exchange composite trading. Freddie Mac, which
ranks second to Fannie Mae, dropped 97 cents to $25.21 yesterday
and is down more than 61 percent in the past year.
Fannie Mae's loan loss ratio was 4 basis points during the
nine months ended Sept. 30. Fannie Mae in November estimated
credit losses this year would double to 8 basis points to
10 basis points.
Miller says Fannie Mae's credit losses will rise to a range
of 15 basis points to 25 basis points this year and in 2009.
Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia
Waller in New York, forecasts a range of 11 basis points to
14 basis points. A basis point is 0.01 percentage point.
Freddie Mac is scheduled to report tomorrow. The McLean,
Virginia-based company had losses of $2.02 billion in the third-
quarter and $480 million in the year-earlier fourth quarter.
in New York Stock Exchange composite trading. Freddie Mac, which
ranks second to Fannie Mae, dropped 97 cents to $25.21 yesterday
and is down more than 61 percent in the past year.
Fannie Mae's loan loss ratio was 4 basis points during the
nine months ended Sept. 30. Fannie Mae in November estimated
credit losses this year would double to 8 basis points to
10 basis points.
Miller says Fannie Mae's credit losses will rise to a range
of 15 basis points to 25 basis points this year and in 2009.
Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia
Waller in New York, forecasts a range of 11 basis points to
14 basis points. A basis point is 0.01 percentage point.
Freddie Mac is scheduled to report tomorrow. The McLean,
Virginia-based company had losses of $2.02 billion in the third-
quarter and $480 million in the year-earlier fourth quarter.
Timely Earnings
Fannie Mae, by reporting timely audited financial results
for the first time since 2004, met conditions for the removal of
a federal limit on its $724 billion in mortgage investments
imposed after a $6.3 billion overstatement of earnings. Its
portfolio of home loans and mortgage-backed securities is one of
its two main sources of profit.
Still, the need to bolster capital against the worsening
housing market will inhibit growth this year, Miller said. Fannie
Mae sold its preferred shares in December after its third-quarter
loss of $1.4 billion.
``For me to get very comfortable in recommending this stock,
I'd like to see something above $15 billion in capital raising,''
Miller said.
Fannie Mae needs to complete the final items on a list of
81 changes in accounting, internal controls and governance in
order to shed a requirement that it set aside 30 percent more
reserve capital than normal, the company's regulator told a
Senate committee on Feb. 8.
for the first time since 2004, met conditions for the removal of
a federal limit on its $724 billion in mortgage investments
imposed after a $6.3 billion overstatement of earnings. Its
portfolio of home loans and mortgage-backed securities is one of
its two main sources of profit.
Still, the need to bolster capital against the worsening
housing market will inhibit growth this year, Miller said. Fannie
Mae sold its preferred shares in December after its third-quarter
loss of $1.4 billion.
``For me to get very comfortable in recommending this stock,
I'd like to see something above $15 billion in capital raising,''
Miller said.
Fannie Mae needs to complete the final items on a list of
81 changes in accounting, internal controls and governance in
order to shed a requirement that it set aside 30 percent more
reserve capital than normal, the company's regulator told a
Senate committee on Feb. 8.
Credit-Default Swaps
The cost of protecting Fannie Mae bonds from default have
doubled this year. Credit-default swaps tied to the bonds rose
6 basis points to 85 basis points today, according to broker
Phoenix Partners Group in New York.
A basis point on a credit-default swap contract protecting
$10 million of debt for five years is equivalent to $1,000 a
year. Credit-default swaps are financial instruments based on
bonds and loans that are used to speculate on a company's ability
to repay debt. They pay the buyer face value in exchange for the
underlying securities or the cash equivalent should a borrower
fail to adhere to its debt agreements.
Congress created Fannie Mae and Freddie Mac to increase
mortgage financing by buying loans from lenders. The publicly
traded companies profit by holding mortgages and mortgage bonds
as investments and by charging a fee to guarantee and package
loans as securities. They record losses when defaults rise.
doubled this year. Credit-default swaps tied to the bonds rose
6 basis points to 85 basis points today, according to broker
Phoenix Partners Group in New York.
A basis point on a credit-default swap contract protecting
$10 million of debt for five years is equivalent to $1,000 a
year. Credit-default swaps are financial instruments based on
bonds and loans that are used to speculate on a company's ability
to repay debt. They pay the buyer face value in exchange for the
underlying securities or the cash equivalent should a borrower
fail to adhere to its debt agreements.
Congress created Fannie Mae and Freddie Mac to increase
mortgage financing by buying loans from lenders. The publicly
traded companies profit by holding mortgages and mortgage bonds
as investments and by charging a fee to guarantee and package
loans as securities. They record losses when defaults rise.
Foreclosures Rise
Bank seizures of U.S. homes almost rose 90 percent to
45,327 last month from the same period a year ago, according to
RealtyTrac Inc., a seller of foreclosure statistics that has a
database of more than 1 million properties. Total foreclosure
filings, which include default and auction notices as well as
bank seizures, increased 57 percent. More than 233,000 properties
were in some stage of default last month, RealtyTrac said in a
statement.
The foreclosures are plunging the housing industry deeper
into recession by pushing more houses onto a market where
existing home sales are now at the lowest level since records
began nine years ago and prices are dropping. There's a 10-month
supply of unsold homes, the highest in at least eight years.
Senate Banking Committee Chairman Christopher Dodd and other
lawmakers have urged the Bush administration for more than seven
months to ease constraints on Fannie Mae and Freddie Mac to help
revive the housing market.
``The restrictions imposed on Freddie and Fannie have a
direct impact on their flexibility to assist the struggling
housing markets,'' Senator Charles Schumer, a Democrat from New
York, said in a Feb. 25 letter to James Lockhart, the director of
the Office of Federal Housing Enterprise Oversight.
45,327 last month from the same period a year ago, according to
RealtyTrac Inc., a seller of foreclosure statistics that has a
database of more than 1 million properties. Total foreclosure
filings, which include default and auction notices as well as
bank seizures, increased 57 percent. More than 233,000 properties
were in some stage of default last month, RealtyTrac said in a
statement.
The foreclosures are plunging the housing industry deeper
into recession by pushing more houses onto a market where
existing home sales are now at the lowest level since records
began nine years ago and prices are dropping. There's a 10-month
supply of unsold homes, the highest in at least eight years.
Senate Banking Committee Chairman Christopher Dodd and other
lawmakers have urged the Bush administration for more than seven
months to ease constraints on Fannie Mae and Freddie Mac to help
revive the housing market.
``The restrictions imposed on Freddie and Fannie have a
direct impact on their flexibility to assist the struggling
housing markets,'' Senator Charles Schumer, a Democrat from New
York, said in a Feb. 25 letter to James Lockhart, the director of
the Office of Federal Housing Enterprise Oversight.
--With reporting by Shannon D. Harrington in New York. Editors:
Romaine Bostick, Emma Moody
Romaine Bostick, Emma Moody
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