Fannie Mae loses $2.2B in 1Q
WASHINGTON (AP) - May 6, 2008 Home prices fell faster in the first quarter than Fannie Mae had
expected, the government-sponsored company said, and it will open a
$4 billion share offering immediately, with the remainder being
offered in the "very near future."
Fannie Mae's federal regulator, the Office of Federal Housing
Enterprise Oversight, announced Tuesday that following the stock
sale, it will cut the capital surplus cushion the company has to
maintain by 5 percentage points to 15 percent. Another five-point
cut will come in September, provided there is "no material adverse
change" in the company's regulatory compliance.
The agency's director, James B. Lockhart, said capital
requirements were eased because Fannie Mae has improved internal
financial controls following a multibillion-dollar accounting
scandal in 2004.
The government has come to rely increasingly on Fannie Mae and
Freddie Mac as other lenders have shied away from the risk-heavy
market for mortgage securities.
In addition to a reduced capital cushion, Fannie's estimated
market share increased to about 50 percent of the new single-family
mortage related securities issued, and investors seemed to welcome
a broader role for the company.
Shares at one point rose nearly 5 percent, were trading up 3.7
percent, or $1.04 cents, at $29.33 by late morning.
The company's estimated fair value of net assets as of March 31
was $12.2 billion, down 66 percent from $35.8 billion at the end of
December. The huge decline was attributed to falling home prices
and changes made to reflect new accounting methods. The assets are
not counted toward the overall loss.
Fannie Mae's first-quarter loss contrasts with a profit of $961
million in the January-March period last year. The company reported
Tuesday that the early 2008 loss was equivalent to $2.57 a share.
It earned 85 cents a share a year earlier.
Wall Street analysts polled by Thomson Financial had expected
the company to lose 81 cents a share in the latest period.
Following Fannie's earnings release, Moody's Investors Service
downgraded Fannie's financial strength rating because of the
potential for credit losses over the next two years.
Reflecting the ravages of the housing crisis, Washington-based
Fannie Mae was forced to set aside $3.2 billion to account for bad
loans. The losses were greatest in the hardest-hit states:
California, Florida, Michigan and Ohio.
And the company said it only expects credit losses to worsen
next year.
"Going forward, we expect our financial results to continue to
be affected by the difficult (housing) market," Fannie's chief
financial officer, Stephen Swad, said in a statement.
Revenue rose 38 percent in the first quarter, to $3.8 billion,
bolstered by increases in fees that Fannie Mae charges lenders to
guarantee mortgages and in interest income.
Amid the deepening housing downturn and the financial turmoil it
sparked, the government has increasingly looked to Fannie Mae and
its smaller government-sponsored sibling, Freddie Mac, to step up
their role and help restore stability to the market by buying up
more mortgages and bundling and selling them as securities.
Three-quarters of mortgage-backed securities are issued by the two
companies.
In March the regulators reduced by a third the mandatory cash
cushion that must be held by Fannie and Freddie, in order to free
up an additional $200 billion to finance new mortgages and help
existing homeowners battered by the roiling market to refinance
into more affordable mortgages.
But analysts worry that the opening for Fannie and Freddie could
put too much financial risk on the backs of the companies, which
have taken multibillion-dollar hits from the foreclosure wave and
have been hungry for capital. Critics have said that allowing the
companies to take on more debt could threaten the global financial
system.
On Tuesday, Fannie Mae said it would cut its dividend, starting
in the third quarter, from 35 cents to 25 cents a share, freeing up
around $390 million a year.
The company already had slashed the dividend 30 percent in
December, when it also raised $7 billion in capital in a special
stock sale.
Fannie Mae said it expects "severe weakness" in the housing
market in 2008, bringing increased mortgage defaults and
foreclosures.