Fannie's pain: $2.3B loss, dividend cut

Mortgage finance giant suffers much larger-than-expected loss due to reserves for credit losses and slashes its dividend to preserve capital.

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By Chris Isidore, senior writer

In return for a four-day work week, the most I would be willing to work is:
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NEW YORK ( -- Mortgage finance giant Fannie Mae, in another sign the nation's housing problems are persisting, reported a much larger-than-expected loss in the second quarter and slashed its dividend on Friday.

The company signaled that its loss rate on its business will double in the second half of the year, and that it will see huge losses through next year because of the continued decline in home prices and rising mortgage foreclosures and delinquencies.

Its executives said the firm will pull back from some segments of the mortgage market and limit its overall growth. Such moves might help Fannie stem its losses but could make it more difficult and expensive for some home buyers to get financing - and that in turn would likely add to the downward pressure on home prices.

Overall, the firm issued a gloomier outlook for the housing market. It said prices are only two-thirds of the way through their eventual full decline. Prices have declined 13% through the end of June from their peak in 2006, and will fall close to 19% before they reach bottom.

"The housing market has returned to earth fast and hard," CEO Daniel Mudd said in a conference call. Uncertainty about the market made it impossible to say "what inning we're in" or when prices would reach bottom,' he said.

"There is progress but we have a long way to go," Mudd added.

Large losses, and more ahead

Fannie reported a net loss of $2.3 billion, or $2.54 a share. Analysts surveyed by Thomson Reuters forecast a loss of 68 cents a share, compared to earnings of $1.86 a share a year earlier. Shares of Fannie (FNM, Fortune 500) were down 9% on Friday.

The much bigger-than-expected loss stemmed from the company's forecast for bigger future losses, which caused it to set aside an additional $3.7 billion and write down the value of its securities.

The company said that the rate of credit market losses for the second half of the year is likely to be more than twice the rate of losses in the first six months. And it sees significant losses on loans continuing into 2009.

Fannie has suffered significant losses from bad loans this year. Its credit losses soared to $1.3 billion in the second quarter, up more than 400% from year-ago levels and up 42% compared to the first quarter.

Much of Fannie's large losses before this quarter came from writedowns in the value of its portfolio of mortgage-backed securities it owns. But clearly the climbing losses on the loans themselves will become an increasing problem in the periods ahead.

Fannie on Friday also slashed its quarterly dividend to 5 cents a share, down 86% from its previous level, as the company tries to maintain its capital reserves. The lower dividend could save it $1.2 billion over a year's time.

Still, even with the reduced dividend and $7.2 billion in additional capital it raised during the second quarter, the company said it is no longer certain that it will have enough capital to carry it through the losses it sees into 2009.

Pulling back from some loans

The company also announced it would pull out of the so-called Alt-A loan business by the end of the year.

Those loans, made to borrowers who do not provide full or any verification of their income, have been responsible for most of the company's losses, even though they are a small percentage of their overall business.

"There is something here for every single constituency to dislike," Mudd said, referring to the company's dividend cut, increase in fees and overall financial results.

And Fannie signaled that it may limit its growth of even some of the safer prime loans it purchases as it tries to limit losses going forward.

"We probably won't play as vibrant as role as in years past," said Peter Niculescu, executive vice president of the mortgage portfolio business for Fannie.

Fannie (FNM, Fortune 500) and sibling company Freddie Mac (FRE, Fortune 500) are shareholder-owned companies set up by the government to provide funding to banks and other lenders making home loans.

They buy loans, attach a guarantee, then sell securities backed by the loans' income stream. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures.

Between them they back or own more than $5 trillion in single family home loans, or roughly half the outstanding U.S. mortgages. The troubles in the housing and credit markets led to shares of both firms plunging in the last two months.

That, in turn, prompted Congress to authorize a rescue plan that would have the Treasury Department loan the firms unlimited amount of money or buy their equity if necessary.

On Wednesday, Freddie reported a much larger-than-expected loss due to the bad loans and slashed its dividend at least 80% in an effort to retain capital it needs to operate.

Shares of both companies tumbled further on that report in Wednesday trading and again Thursday, leaving Fannie shares off 61% between June 16 and Thursday's close. Freddie shares are off 75% in the same period. To top of page

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