By James Tyson
Feb. 27 (Bloomberg) -- Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion fourth-quarter loss and said the slump will continue through this year as rising foreclosures send credit costs soaring. The net loss was wider than analysts anticipated, sending the shares down 6 percent in early New York trading. The loss included a $3.2 billion drop in the value of derivative contracts and $2.9 billion in credit expenses, the Washington-based company said today in a Securities and Exchange Commission filing. ``We are working through the toughest housing and mortgage markets in a generation,'' Fannie Mae Chief Executive Officer Daniel Mudd said in an accompanying statement. Homeowners falling behind on their loan payments and an economy teetering near recession are reducing the value of the $2.3 trillion of mortgages the government-chartered company owns or guarantees. The slump may force Fannie Mae, which sold preferred stock in December to bolster capital, 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. The shares dropped to as low as $25.10 in early trading today. 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. The net loss amounted to $3.80 share, compared with profit of $604 million, or 49 cents, a year earlier, Fannie Mae said. Excluding some items, the per-share loss was $3.79, compared with the $1.20 average estimate of 12 analysts in a Bloomberg survey.
Fannie Mae's loan loss ratio was 9 basis points in 2007, up from 0.3 basis points at the end of 2006. Miller says 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.
Credit-Default Swaps
The cost of protecting Fannie Mae bonds from default have doubled this year. Credit-default swaps tied to the bonds rose 8 basis points to 87 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
Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Fannie Mae and other companies use derivatives to hedge against losses on assets and investments including home loans and mortgage bonds. 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.
