Fannie Loses $2.2 Billion As Home Prices Fall

Each dollar of additional capital it raises would enable it to increase its mortgage holdings by about $35 or expand its mortgage guarantees by about $193, according to OFHEO.

To help homeowners caught in the market crisis, Fannie Mae said it would take the unusual step of allowing borrowers whose homes are worth less than their mortgages to refinance up to 120 percent of the property value. That option would be offered to homeowners whose loans are owned by Fannie Mae and who remain up to date on their mortgage payments.

Much of the $6 billion of common and preferred stock the company issues to raise money would dilute the value of current investors' shares, and Fannie Mae plans to compound the injury by cutting the dividend it pays shareholders by 29 percent in the third quarter.

In a conference call with Wall Street analysts, Mudd said the trade-offs the company is making now to extend its reach will pay off for shareholders over the long run.

"We will feast off this . . . business that we're putting on for many years to come," Mudd said.

Fannie Mae's stock rose $2.52, nearly 9 percent, to $30.81 a share.

Fannie Mae estimated that it exceeded its capital requirement by $5.1 billion. OFHEO's agreement to ease the restriction reflects a continuing shift in the government's posture toward the company and its federally chartered sibling, Freddie Mac of McLean.

When the housing market appeared healthy, many government officials were focused on containing the risks that they feared the two firms' vast mortgage holdings posed to the financial system. Although the government does not explicitly back the two companies, investors generally assume that taxpayers would be called on to bail them out if either became insolvent.

Since the housing bubble burst and other investors have deserted the home loan market, the government has turned to Fannie Mae and Freddie Mac to fill the void. In the process, it has eased a series of constraints on the companies.

"[W]e are being asked to play a broader role in the future of U.S. housing," Mudd said yesterday.

The shift comes as legislation to give regulators more power over Fannie Mae and Freddie Mac remains stalled.

The government's accommodations have been based partly on the two companies' progress in recovering from accounting scandals of years ago.

"The lowering of the prudential cushion was appropriate in line with the company's progress and with the need to maintain safe and sound operations," OFHEO Director James B. Lockhart III said in a statement.

The $2.19 billion of red ink ($2.57 a share) Fannie Mae incurred during the three months ended March 31 contrasted with the $961 million profit (85 cents) it reported in the first quarter of 2007.

Measured in relation to Fannie Mae's overall mortgage guarantees, the company's expenses from foreclosures and other credit problems rose 55.6 percent during the first three months of 2008 compared with the already substantial trouble the company reported in the last quarter of 2007.

One factor was that home prices fell an average of 3 percent in the quarter, faster than the company expected when it was predicting full-year declines of 5 to 7 percent. It said it now expects home prices to fall 7 to 9 percent nationally this year.

Fannie Mae's financial report also showed that it ended the quarter with $9.3 billion of unrealized losses on mortgage investments that it has not yet included in its bottom line, up from $4.8 billion on Dec. 31. Fannie Mae predicts that those securities, most of which have been impaired for a year or more, will recover their lost value.