Fannie Mae Expenses Up Sixfold From Bad Loans

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, November 10, 2007

Fannie Mae, the giant mortgage-funding company, yesterday reported that deterioration in the housing market led to a sixfold increase in its expenses for loan delinquencies and foreclosures during the third quarter.

The company said it expects significant increases in its foreclosures and serious delinquencies next year. The financial toll has been exacerbated by rapidly declining sales prices on foreclosed properties, reducing the amount of money the company can recover when homeowners default on their mortgages, Fannie Mae said.

"We now believe that home prices won't begin to stabilize until the end of '09," chief executive Daniel H. Mudd said on a conference call with Wall Street analysts, predicting that prices nationwide will decline by an average of 4 percent next year.

Fannie Mae was one of several big financial institutions to report declines as turmoil in the mortgage industry spread to the broader credit market.

Wachovia, the nation's fourth-largest banking company, yesterday said the value of securities it owns that are backed by loans sank by about $1.1 billion in October, and it plans to increase its allowance for loan losses in the fourth quarter. Bank of America and J.P. Morgan Chase warned that their earnings may suffer next quarter.

In recent days, Citigroup said it will likely take between $8 billion and $11 billion in write-downs during the fourth quarter, while Morgan Stanley said it will take up to $6 billion in write-downs during its fiscal fourth quarter, which ends Nov. 30.

Yesterday's news, which was worse than investors had been expecting, contributed to a significant decline in the stock markets. Fannie Mae shares plunged in early trading but then rebounded to end the day down only 1.6 percent.

Chartered by the government to keep money flowing to lenders, Fannie Mae packages mortgages into securities for sale to investors, promising to pay all principal and interest owed if the borrowers default. Fannie Mae, based in the District, also buys mortgages from lenders and holds them in its own portfolio.

The company has been recovering from a 2004 accounting scandal that erased $6.3 billion of previously reported profit and exposed other internal problems that had until yesterday prevented it from reporting routine financial results on a normal schedule. Yesterday, Fannie Mae filed reports for the first three fiscal quarters of this year.

The company said its expenses related to delinquencies and foreclosures grew to $1.2 billion for the third quarter of 2007 from $197 million for the third quarter of 2006. For the first nine months of 2007, those expenses more than quadrupled to $2.0 billion from $457 million in the corresponding period last year.

Fannie Mae also showed that it wasn't immune to the meltdown in securities backed by mortgages of dubious quality. The company recorded $1.3 billion in unrealized losses during the nine-month period related to the declining value of investments backed by subprime and Alt-A loans, which are those made to borrowers with weak credit histories or undocumented income.

The bottom line was that Fannie Mae lost $1.4 billion in the quarter ended Sept. 30, compared with a loss of $629 million. For the first nine months of 2007, Fannie Mae reported a profit of $1.5 billion, down from $3.5 billion.

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