After Big Loss, Fannie Mae Gets $15 Billion in Federal Aid
Friday, February 27, 2009
Fannie Mae, the federally run mortgage giant, said last night that it lost $59 billion in 2008, prompting a government cash injection of $15 billion.
The District-based company said it lost $25.2 billion in the fourth quarter of 2008 on the decline of mortgage-related investments.
The cash injection came in at the higher range of what Fannie Mae said it would need late last month. It represents the first government money invested in Fannie Mae; Freddie Mac, its McLean sibling, has already received $14 billion and said recently that it may need up to $35 billion more when it reports earnings in the coming days.
Fannie Mae's losses are likely to continue, the company said. "We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009," the company said. "We now expect that we will experience a peak-to-trough home price decline of 20 percent to 30 percent, rather than the 15 percent to 19 percent decline we predicted last year," the company said.
In anticipation of growing losses, the Treasury Department recently said it was doubling the amount of money it is willing to invest in the companies. Fannie and Freddie are both eligible to receive up to $200 billion in taxpayer dollars.
Fannie and Freddie are instrumental elements of the government's rescue plan for homeowners. The companies are modifying hundreds of thousands of mortgages to try to make them more affordable for struggling homeowners.
One bright spot for Fannie came in its ability to finance its debt, which is central to the company's ability to buy mortgages and bundle them, supplying money for more mortgage lending.
The market crisis severely undermined the company's ability to raise affordable financing last fall. But the announcement by the Federal Reserve that it would buy the company's debt and other steps helped bring down the costs of funding.
If Freddie follows through with a $35 billion request, it will bring the total amount of government investment in the companies to $64 billion. This money is separate from the $700 billion financial rescue plan.
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 predominantly 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.