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Fannie Mae To Seek Funds From Treasury

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By Zachary A. Goldfarb
Washington Post Staff Writer
Tuesday, January 27, 2009

Fannie Mae said yesterday that it expects to request up to $16 billion from the Treasury Department, marking the first time the federally run mortgage giant will tap the government's largesse.

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Freddie Mac has already received $13.8 billion from the government and said Friday that it expected to request up to $35 billion more when it reports earnings next month.

If Fannie Mae and Freddie Mac both ask for the maximum they've indicated, the price tag for the government takeover of the companies in its first five months would be $64.8 billion. That money is separate from the $700 billion that the government is using to bail out the financial and auto sectors.

When the government seized Fannie Mae and Freddie Mac last year, federal officials pledged up to $100 billion for each to keep them stable. Investments are to be made whenever a company's assets are worth less than its liabilities, giving the company a negative worth. In the third quarter, Fannie Mae and Freddie Mac reported a combined $54 billion in losses.

Those losses put McLean-based Freddie Mac under water, prompting the first government investment in November. District-based Fannie Mae didn't need government cash at the time, though its cushion against further losses withered significantly. The company's overall value at the time was $9.4 billion.

Fannie Mae's need for government cash reflects the worsening economic picture in the past few months. The value of mortgage securities that Fannie Mae owns has suffered as homeowners have had trouble paying their home loans and more properties have gone into foreclosure. Fannie Mae has to report this decrease in value as a loss.

But Fannie Mae has a second problem. It insures mortgages and mortgage bonds for investors around the world, promising timely payment of principal and interest. As these securities have gone bad, Fannie Mae has had to cover the losses.

Historically, Fannie Mae insured the highest-quality mortgage bonds. But in the final years of the housing boom, the company rushed into insuring bonds consisting of home loans extended to people who did not provide proof of their income or employment. These types of mortgages turned out to be toxic.

Fannie Mae and Freddie Mac's requests for government assistance would compensate for losses only in 2008. The companies would make the formal requests for aid when they report their fourth quarter and 2008 annual earnings next month.

Given economic conditions, Jim Vogel, an analyst at FTN Financial in Tennessee, said in a research note yesterday that a loss for Fannie Mae of up to $25 billion in the fourth quarter would not be surprising -- "which is a shocking statement in itself, but it's true."

The year could bring more losses for Fannie Mae, depending on the state of the economy and housing market and what happens in Congress.

Lawmakers are pursuing legislation that would let bankruptcy judges rewrite mortgages to make them more affordable for homeowners -- and force lenders to take a loss as the mortgages are written down in value.

"There will be another significant hit in the first quarter as the values of these securities declined significantly following the announcement of bankruptcy cram down legislation," wrote Moshe Orenbuch, an analyst at Credit Suisse. "For Fannie and Freddie alone, this could cost the Treasury another $20 billion or so in early 2009."

Freddie Mac and Fannie Mae have agreed to modify thousands of mortgages to make them more affordable for borrowers who might lose their homes otherwise. The companies also said they would stop evicting or foreclosing on homeowners through the end of this month. These efforts might not cost the companies more than a few billion dollars.


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