As Defaults Climb, Fannie Mae Posts $2.3 Billion Loss

"The housing market has returned to earth hard and fast," chief executive Daniel H. Mudd says. (Carol T. Powers - Bloomberg News)
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By David S. Hilzenrath
Washington Post Staff Writer
Saturday, August 9, 2008

Fannie Mae, a key source of support for the nation's struggling housing market, reported yesterday that its expenses from foreclosures and bad loans rose 64.9 percent during the second quarter and predicted deepening trouble ahead, heightening concerns that the federal government may have to come to the company's rescue.

The company said it is taking a variety of steps to avoid becoming undercapitalized as a result of further deterioration in the housing market, including cutting its third-quarter dividend to 5 cents per share, from 35 cents per share.

"The housing market has returned to earth hard and fast," chief executive Daniel H. Mudd said in conference call with analysts to discuss earnings.

Overall, Fannie Mae lost $2.3 billion ($2.54 per share) in the quarter ended June 30, more than triple what Wall Street analysts had expected and compared with a loss of $2.2 billion ($2.57) in the first quarter. In the second quarter last year, the company made a profit of $1.95 billion.

Fannie Mae's stock fell sharply on the earnings report, bucking a surge in other financial stocks to finish down 9 percent at $9.05.

Losses directly related to problems in the housing market were especially pronounced. The losses from foreclosures and other problem loans rose to $5.3 billion in the second quarter, from $3.2 billion in the first quarter. In July, the challenge grew even steeper, Mudd said.

A market that "many of us had already described as the worst in a generation took a turn for the worse after the quarter ended," he said, citing even higher defaults and sharper declines in home prices.

Along with rival Freddie Mac of McLean, the District-based company is one of the main sources of funding for mortgage lenders. The government has been depending on it to keep home prices from falling even more sharply. Fannie Mae's report followed a similarly grim report this week from Freddie Mac.

Fannie Mae packages mortgages into securities for sale to investors, promising to pay the investors if the borrowers default. It also buys securities backed by home loans. Its mortgage investments and guarantees total $3 trillion.

The meltdown of the housing market has taken a heavy toll on Fannie Mae and Freddie Mac, producing quarter after quarter of losses and wiping out most of the value of their stocks.

A panicked sell-off in shares of both companies last month prompted Congress and President Bush to adopt a rescue plan under which the Treasury can inject unlimited amounts of taxpayer money into the companies through loans or stock purchases, depending on their financial health.

Freddie Mac reported earlier this week that losses from failed loans nearly doubled during the second quarter, and it issued a significantly more pessimistic forecast for home price declines.

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