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.

By Dan Beyers  |  February 27, 2008; 9:45 AM ET  | Category:  Fannie Mae
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Please email us to report offensive comments.

No problemo. Two of McCain's unpaid campaign managers, Steve Schmidt and Mark McKinnon, are Fannie Mae lobbyists.

So if McCain is elected, he'll owe big favors to Fannie Mae.

I'm sure Fannie Mae's problems are nothing that can't be solved with a little Keating Five-style "deregulation".

Don't worry about the small investors. They don't have McCain lobbyists, so their interests can be safely ignored. Just like with Keating.

Yup, with 59 registered federal lobbyists bundling for McCain - an all-time record - come January 2009 it'll be favors, backscratching, and deregulation all round.

Have you driven your company into the ground through mismanagement? Just send your campaign contribution to John McCain, US Senate, and he will make your problems go away.

Posted by: OD | February 27, 2008 11:27 AM

When will the stimulus package provisions that allow Fanniemae and Freddiemac to purchase loans larger than $417k in high-end markets kick in? We're planning on putting more than 20% down, but we'll still need a "jumbo" to buy in this area, but that stimulus package hasn't had any effect on the jumbo amount or rates yet.

Posted by: Waiting to buy | February 27, 2008 12:12 PM

It will not work this time...

And Fanny and Freddy may die...

Posted by: Anonymous | February 27, 2008 2:08 PM

Deregulation got us into this mess and good old fashion, pain-in-the-rear regulation will get us out. As long as Fannie and others allow debt ratios (the percentage of your total monthly obligations) to go to almost 40%, and 50% in some cases, without considering monthly expenses such as child care, groceries, utilities, etc, American, namely the middle class, will continue to feel economic burden, particularly because of housing costs. It's not a big shocker that foreclosures are on the rise. But this just isn't about subprime. This is about the over inflated housing costs and lenient lending guidelines, particularly liberal debt ration allowances.

Not everyone should own a home, nor should homeownership be equated with this "American Dream" we hear about.

Wake up folks.

Posted by: Anonymous | February 27, 2008 3:02 PM

Let's see...Fannie Mae and Freddy Mac are in financial trouble due to bad mortgages that they bought. So it's only natural for Congress to lift the $412k limit on the size of mortgages they can buy so they can buy more bad loans. Interesting...

Posted by: Congress | February 27, 2008 3:39 PM

So here's the billion dollar question - Who fell asleep at the wheel regarding over-inflated real estate appraisals? Think about it, Lenders control the entire real estate appraisal process from beginning to end. They use 'preferred' vendors, AVM's and appraisal management companies and have no obligation to look objectively at property values. Many local appraisers went out of business due to appraisal automation and that's a fact!

We all know the parallel investor/speculator market helped push 'comps' and 'property values' to astronomical levels - and they went unchecked for years. The Government, Banks, Lenders, Taxing Authorities, Media, etc. went from discussing 'Record Gains' to 'Financial Ruin'. Too bad the American people heard very little about the possibility of over-valued real estate prices until it was way too late.

More importantly - appraisal regulation assists in pushing up the money supply (by way of helping to increase the value of collateral), economic activity (via higher and higher loan amounts in cash out refinancings), and lender profits. As such, regulation is little more than a ruse designed to shift financial liability for losses from the appraisal client (i.e., the lending industry) to the Federal government who is now responsible for appraisal oversight.

Now that the Nation is experiencing another serious financial "adjustment" like the S&L Crisis, lenders and GSEs will be able to point to Federally mandated appraisal regulation as their free pass to escape a Congressional inquisition (where property valuations may be called into question). They will have the appearance of having done everything according to "the book." The investor groups suffering damages from having purchased loan packages (with this designer gift wrap) will have to seek a bail out from the government - the ultimate underwriter and the overseer of lending and appraisal regulation.

But like a bank that leaves the vault open, lenders are "surprised" that the values are inflated and property conditions mischaracterized. What rational person or entity lends without knowing the collateral's value? Lenders do business exactly this way.

I'd compare it to picking your own umpires in a game where you have home field advantage. To fix the problem we need to focus on relieving the bank or lender from their duties re: ordering, scheduling and paying for over-valued appraisals, paying for it with the purchasers money, and selecting appraisal 'vendors' that simply roll over and comply. After all, someone has to look at property valuations objectively.

PS here you will find some good examples:

Posted by: TA Webster | February 27, 2008 3:46 PM

like everyone expects the Spainish Inquisiton...

you have the Three Stooges running the whitehouse with no oversight and no accountability

and when things go wrong it's

"someone else's fault,"

who has been telling the United States that there was no problem with the economy and that rich people needed tax breaks ????

Greenspan? Bernake?

no cheenie, bush, rove the kagans and a host of other pundits that said

nothing is more important than stealing IRAQ's oil


that is what they have been saying isn't it?

no one noticed that GDP wasn't tied to production anymore ???? WHOOOOOOOOOPS


Posted by: you all act | February 27, 2008 4:29 PM

this is it in a nutshell

cheenie, bush, rove the kagans and a host of other pundits that said

nothing is more important than stealing IRAQ's oil


That _i_s_ what they have been saying

isn't it?

so when the lack of oversight and honesty starts destroying AMERICAN LIVES

these pikers say? "how did that happen."

are you stupid enough to let them get away with it? attach and liquidate

_THEIR_ properties, then try them for treason and shoot them...thanks so much.


Posted by: an urbane gentle man | February 27, 2008 4:35 PM

learn a little bit about the mortgage market

Fannie and Freddie don't make mortagages...

they guarantee mortgage pools and resell them as a favor for bankers...

the banks are supposed to do the credit checking, not Fannie or Freddie


they provide BALLAST. Freddie and Fannie didn't make

BAD LOANS the banks that Freddie and Fannie service made the bad loans...

I would assume that MONEY LAUNDERING the bushes drug money is part of the problem....

who owns the 5/3rds banks that are coming into the United States ???


Posted by: look | February 27, 2008 4:40 PM

F&F back over 4 trillion in mortgages--
YET they have just 34 billion in capital to cover losses---Do the math, peeps!

34 billion is a few bad months. It is crystal clear that the "No Taxpayer" Bail out Bush administration is setting us up for exactly THAT. They know F&F are just 7 months or so from probable failure--and are in the process on transferring the whole mess onto the backs of hard saving, tax paying citizens everywhere!

Posted by: Bobj | February 27, 2008 6:19 PM

"Fannie Posts $3.6 Billion Loss; Gov't Eases Portfolio Cap" WHATTTTTTTTT???!!

How can those 2 statements be contained in the same sentence?!!! Taxpayers everywhere better get VERRRY alarmed, because the govt. is setting this up for them to bail it out!

How can the sanctity of CONTRACT LAW in this country be so destroyed by these boneheads in power!! This is an OUTRAGE

Posted by: FannieFailure | February 27, 2008 6:24 PM

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