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Fannie Mae's second-quarter loss smallest since government seized housing firm

A single-family home under construction in Thornton, Colo. Fannie Mae decreased its losses in the second quarter, but its fortunes could again sour if the housing market again weakens significantly.
A single-family home under construction in Thornton, Colo. Fannie Mae decreased its losses in the second quarter, but its fortunes could again sour if the housing market again weakens significantly. (Matthew Staver/bloomberg News)

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Bar chart shows Fannie Mae reported a narrower loss in the most-recent quarter.
By Zachary A. Goldfarb
Friday, August 6, 2010

Fannie Mae reported Thursday that its loss in the second quarter shrank dramatically and that the company had put away enough money to cover most of the losses it expects in the future, likely reducing -- but not eliminating -- the need for additional taxpayer aid.

In a sign of the topsy-turvy world Fannie Mae now lives in, the company also said it would ask the government for another $1.5 billion to cover losses even as it was paying the government $1.9 billion in dividends on rescue funds it provided earlier.

The mortgage finance giant, whose fortunes could again sour if the housing market weakens significantly, offered its most positive earnings report since the federal government seized the firm two years ago, disclosing its smallest loss in three years. Fannie Mae reported a loss of $1.2 billion, compared with $11.5 billion in the first quarter.

The report comes as the Obama administration and Congress begin to devise a new housing finance system to replace District-based Fannie and its McLean cousin, Freddie Mac. No decision has been announced. Fannie's improved earnings could influence the debate over what to do after the worst housing crisis since the Great Depression.

The report could reduce the urgency of replacing Fannie and Freddie, since a major argument against the government's current role is that the agencies represent a money pit for taxpayers.

But at the same time, if the improved earnings reflect a wider improvement in housing finance, that could bode well for any administration effort to wind down the companies without disrupting the mortgage market. In the report, the company said that far fewer borrowers were paying their monthly bills late and that its new business was performing better than it has in a decade.

The earnings report also revealed how the government's hold over Fannie and Freddie is posing unusual challenges for the firms. Fannie, for instance, has already received $85 billion from the Treasury Department to offset losses. Under an agreement with the Treasury and the Federal Housing Finance Agency, Fannie must ask for capital infusions to cover any losses that put the company in the red.

Fannie must pay a 10 percent rate on any money it borrows, meaning the annual dividend will near $9 billion this year. The massive dividend requires Fannie to borrow money from the Treasury to pay taxpayers back, creating a cycle of ever-increasing demands for taxpayer infusions and dividend payments.

The only way Fannie could escape this vicious cycle is by making massive profits -- far more than it has ever made in the past.

"It is unlikely that Fannie Mae or Freddie Mac will generate those after-tax earnings in the foreseeable future," said George Mason University real estate finance professor Anthony Sanders. "House prices would need to re-inflate to 2006 levels to substantially cover the losses for the mortgage giants."

It would actually be less expensive for Fannie or Freddie to borrow money from the private capital markets than from the government. This week, for example, the company raised $7 billion in private money at a rate of just over 1 percent -- a rate that is exceptionally low because the government stands behind the firm.

Fannie Mae chief executive Mike Williams said in a statement that the improved results reflected the conservative approach recently adopted by the company.


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