- The Washington Times - Thursday, February 28, 2008


Fannie Mae and Freddie Mac will be allowed to expand their roles in the turbulent mortgage market even as worsening conditions in the housing sector punish the two companies.

Washington-based Fannie, the largest buyer and backer of U.S. home loans, said yesterday that it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. McLean-based Freddie is expected to report a $1.5 billion fourth-quarter loss today, according to Wall Street estimates.

Under a previous agreement with federal regulators, the timely filing of Fannie’s and Freddie’s financial results triggers the removal of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the government-sponsored companies.

Analysts said the effect will be limited, however, because of the large cash cushion that Fannie and No. 2 mortgage financer Freddie must maintain as a reserve against risk. Tightness in credit markets makes it expensive for Fannie and Freddie to marshal additional funds.

Fannie, which gave a pessimistic housing outlook for 2008, said that close to 90 percent of its fourth-quarter losses stemmed from investments that it made based on the assumption that falling interest rates would cause mortgage values to appreciate.

Shares of Fannie, the largest U.S. buyer and backer of home loans, swung widely after the report was released, initially falling by more than 5 percent and later rising by as much as 15 percent before winding up the trading day just 30 cents higher at $27.27. Shares of Freddie fell 12 cents to $25.09.

Fannie’s $3.56 billion quarterly loss more than doubled from a loss of $1.4 billion in the third quarter of 2007 and contrasts with a profit of $604 million in the comparable period a year earlier. The loss was equivalent to $3.80 a share, far steeper than the $1.24-per-share loss forecast by analysts.

“The housing conditions are serious, and they’ve gotten worse,” Daniel Mudd, Fannie Mae’s president and chief executive, said in a conference call with analysts. “This is an extraordinarily uncertain market.”

Mr. Mudd called 2008 “another tough year.”

If current market conditions continue or worsen, the company said, it may have to raise new capital by selling off mortgage investments, mounting another sale of special stock or further reducing — or even eliminating — its dividend.

A silver lining for Fannie, executives said, will be the anticipated wave of refinancing activity as borrowers with adjustable loans resetting at higher rates secure more affordable, fixed-rate mortgages. Plans put in place by the Bush administration and Congress are intended to prime the mortgage-market pump, although the effects so far have been limited.

An additional spark to the mortgage market could come after yesterday’s announcement by the Office of Federal Housing Enterprise Oversight that on March 1, it will remove the combined $1.5 trillion cap on Fannie’s and Freddie’s mortgage holdings.

However, a bigger constraint on the companies’ ability to buy mortgages has been a government mandate that requires Fannie and Freddie to keep 30 percent more capital in reserve than the minimum legal requirement, analysts said. That restriction, which the government is considering decreasing gradually, means that Fannie and Freddie would have to boost their reserves by billions more to be able to make more loan purchases.

“The question becomes, do they have the capital to maintain a larger portfolio?” said Bert Ely, a banking consultant based in Alexandria.

Because of the required 30 percent cushion, the companies were forced to cut their dividends and sell special stock to raise $13 billion in capital last year.

“Our No. 1 priority is capital,” Mr. Mudd said in the conference call.

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