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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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Paul J. Miller, an analyst with Friedman, Billings, Ramsey Group, said Fannie Mae's losses increase the likelihood that Treasury would use its new powers to help keep the company afloat. But added that he still doubts this will occur.
Over the coming months, Miller said, he expects even more worrying news for Fannie Mae and Freddie Mac. "To use a baseball metaphor," he said, "we're still in the third or fourth inning."
A key factor that may determine whether the government ends up bailing out either company is their level of capital, the financial cushion they are required to maintain to reduce the risk of insolvency.
Fannie Mae said that, based on internal projections, it is unclear whether the company can maintain the requisite capital through next year. Some of the company's projections indicated it could not.
After raising more than $7 billion of new capital during the second quarter, Fannie Mae said its $47 billion of capital as of June 30 exceeded the regulatory requirement by $9.4 billion. Many investors believe the requirement is much too low in relation to the multitrillion-dollar scale of the company's business.
Falling out of compliance with the capital requirement could trigger regulatory action to restrict Fannie Mae's operations.
To reduce the odds of that happening, Fannie Mae said it will cut annual operating costs 10 percent by the end of next year and increase the fees it charges to guarantee payments to investors in its mortgage-backed securities. The higher fees could be passed along to consumers, which could further stress the housing market.
The company said that by the end of this year, it will stop investing in new Alt-A loans, which have accounted for much of its losses. The term generally refers to loans issued on the basis of little or no proof of the borrower's income. Fannie Mae continued to invest in Alt-A loans even after the housing bubble burst.
"There is something here for every single constituency to dislike," Mudd said, referring to the raft of measures to conserve capital.
Fannie Mae said it will intensify efforts to recover some of its losses from lenders in which the lending decisions involved fraud or other improprieties. The company said it will also beef up its capacity to dispose of foreclosed homes.
To cover anticipated costs from bad loans, the company added $3.7 billion to its reserves in the second quarter, bringing them to $8.9 billion. Meanwhile, it wrote down by $507 million the value of investments in securities backed by subprime loans and other mortgages issued based on relaxed standards.
"The market remains extraordinarily challenging," Mudd said. "We're taking aggressive action to preserve capital and control our credit losses. Underneath that, the fundamentals of the business are strong."
Staff writer Jeffrey H. Birnbaum and staff researcher Madonna Lebling contributed to this report.
