Fannie Posts $3.6 Billion Loss; Gov't Eases Portfolio Cap
Here's an update to our earlier report:
By David S. Hilzenrath
Fannie Mae, the mortgage funding giant, today reported that it lost $3.6 billion in the fourth quarter of 2007, compared with a profit of $604 million in the comparable period a year earlier.
The deepening red ink reflected rising mortgage defaults, falling home prices, and "extraordinary disruptions in the credit markets," Fannie Mae chief executive Daniel H. Mudd said in a news release.
The fourth quarter woes helped drive Fannie Mae's annual loss for 2007 to $2.1 billion, compared with a profit of $4.1 billion for 2006.
The outlook for housing prices in general and Fannie Mae's financial performance in particular is worse than the company has been predicting, Fannie Mae said today.
Fannie Mae now expects average peak-to-trough declines in home prices of 13 to 17 percent before the market recovers, compared with its earlier predictions of 10 to 12 percent.
Despite that news, Fannie Mae's shares were up more than 5 percent in late morning trading after a federal regulatory agency announced that it will remove caps on investments by the company and its competitor Freddie Mac.
Chartered by the government but traded on the stock market, District-based Fannie Mae plays a major behind-the-scenes role in the nation's housing system. Fannie Mae pools mortgages into securities for sale to investors, promising to pay the principal and interest if the borrowers default. Fannie Mae also purchases mortgages and securities backed by mortgages for its own investment portfolio. As of December, the company's mortgage investments and guarantees totaled about $2.9 trillion.
The 2007 annual report was the first Fannie Mae had issued on a timely basis since it became mired in an accounting scandal in 2004. In the years since, the company has undertaken a massive effort to rebuild its internal systems to remedy pervasive weaknesses. With the filing of the report today, Fannie Mae declared its rebuilding complete.
Freddie Mac, which disclosed billions of dollars of accounting problems in 2003, has been through a similarly protracted recovery process and is scheduled to issue its annual results for 2007 tomorrow.
In light of those accomplishments, the Office of Federal Housing Enterprise Oversight said today that it will remove a limit on the size of Fannie Mae's portfolio that was imposed in 2006, when Fannie Mae agreed to pay a $400 million penalty for its improper accounting. OFHEO is also lifting the cap on Freddie Mac, effective March 1.
Though Fannie Mae spent much of last year arguing that OFHEO should lift the limit on its investments and thereby liberate it to provide greater assistance to an ailing market, removing the limit now comes as a somewhat hollow victory. Amid continuing financial trouble, a more important constraint on the companies' business is the amount of capital they must maintain as a cushion against losses, OFHEO director James B. Lockhart has said recently.
Both Fannie Mae and Freddie Mac have been operating under heightened capital requirements since 2004. Lockhart today said his agency will talk to the companies about "the gradual decreasing" of that requirement, but he cautioned that he would take into account a variety of factors including the companies' financial condition, broader market conditions, and "the importance of the Enterprises remaining soundly capitalized."
In recent Senate testimony, Lockhart said he would be "much more comfortable" easing the capital requirement if Congress passed long-stalled legislation giving his agency greater power to regulate the companies' capital.
Fannie's stock was trading at $28.57 shortly before noon, up 5.9 percent today but still far off its high for the past year of $70.57.
Mortgage analyst Walter N. Schmidt of FTN Financial Capital Markets, a bond dealer, said Fannie's stock was up partly because investors took Lockhart's statement today as movement toward an eventual removal of the capital requirement.
Fannie's $3.56 billion fourth-quarter loss was equivalent to $3.80 a share, much larger than Wall Street had anticipated. It earned 49 cents a share profit a year earlier. Thomson Financial said Wall Street analysts had expected the company to lose $1.24 a share in the latest period.
Fannie Mae's annual results included $160 million of writedowns on the value of securities backed by subprime mortgages.
Not reflected in the results, however, was an additional $3.3 billion of unrealized losses on securities backed by subprime mortgages and other unconventional loans. Fannie Mae said it has not yet recorded losses on those investments because it believes they will recover their lost value.
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