Government Frees Freddie, Fannie Reins Despite Huge Losses

By Reuters -  |  Posted 2008-02-27 Print this article Print

Fannie Mae and Freddie Mac could have billions of dollars more to fund home purchases after the government lifted caps on the two largest U.S. mortgage finance companies to ease a housing crisis.

NEW YORK (Reuters) - Fannie Mae and Freddie Mac could have billions of dollars more to fund home purchases after the government on Wednesday lifted caps on the two largest U.S. mortgage finance companies to ease a housing crisis.

The restrictions were lifted despite Fannie Mae's staggering quarterly loss of $3.6 billion as defaults and foreclosures surged. The company also warned there could be a "significant" worsening in the real estate market.

Fannie Mae and smaller rival Freddie Mac have lobbied their regulator to lift the restrictions on their combined $1.4 trillion portfolios to give them the ability to buy more mortgages from lenders and support housing.

However, Fannie Mae's chief executive officer said the company will be conservative in using its capital to buy loans as it wants to limit losses.

Fannie Mae shares surged after the Office of Federal Housing Enterprise Oversight said that on Saturday it will remove the caps on the companies, known as government-sponsored enterprises, that have restricted growth for three years. The portfolios provides most of the companies' profit.

"The GSEs are really looked to as the last great hope for the housing market," said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania. "To the extent that they will be able to grow their portfolio, their earnings will grow."

Washington-based Fannie Mae on Wednesday posted a $3.80 per share net loss for the fourth quarter, compared with a profit of $604 million in the year-earlier period. It stock tumbled in November when it reported a $1.52 billion third-quarter loss.

Analysts expected the company would post a fourth-quarter loss of $1.39 per share, according to Reuters Estimates.

Losses at Fannie Mae and rival Freddie Mac have constrained their ability to support the housing market that by some measures is in its worst funk since the Great Depression.

Analysts said the key for Fannie Mae's growth is the company's capital, which rose last quarter to $3.9 billion above its regulatory minimum.

"Our strategy for moving through another tough year is to protect and conserve our capital base, and control credit losses," Fannie Mae CEO Daniel Mudd said in a statement.

The GSE said it will suffer bigger losses on home loans than it forecast just three months ago as the declines in house prices accelerates and foreclosures rise. It increased its credit loss ratio forecast to a range of 11 basis points to 15 basis points in 2008 from the 8 to 10 basis points it forecast in November.

The forecast for the credit loss ratio, or losses as a percent of the loans it guarantees, is well above 5.3 basis points for 2007 and 2.2 basis points in 2006, Fannie Mae said.

Falling home prices after years of loose underwriting standards and a speculative frenzy have filtered from risky subprime loans to the prime loans that make up most of Fannie Mae's business, shocking investors who thought the company was better protected.

Fannie Mae said its results were largely driven by a $3.2 billion loss on derivative contracts used to hedge its investment portfolio as interest rates declined.

Rising delinquencies and foreclosures also forced Fannie Mae to write down the value of mortgage securities it owns and to increase reserves to cover their guarantees of payments on bonds held by investors.

Fannie Mae's report "is disturbing," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "It confirms the market's expectation, or fear, of another shoe to drop."

Credit-related expenses soared to $3 billion last quarter from $326 million in the same period for 2006. Revenue rose 8.6 percent to $3.1 billion, driven by a 26.4 percent increase in guaranty fee income.

The earnings report initially drove Fannie Mae shares to a 12-year low at $25.33, but OFHEO announcement on portfolio caps sent them rocketing as much as 17 percent higher. I early afternoon the stock was up 2.8 percent at $27.72.

Regulators and lawmakers have leaned harder on Fannie Mae Fannie Mae, which was created in 1938 to boost homeownership, in recent months to bolster the housing market, most recently by increasing the size of loans eligible for their purchase. However, losses at the companies have squeezed their profits and reduced their ability to expand.

Fannie Mae shares have fallen 33 percent this year through the market close on Tuesday, compared with a 3.8 percent drop in the KBW Mortgage Finance index .MFX over the same period.

(Additional reporting by Herb Lash and Jennifer Ablan; Editing by Tom Hals)


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