Fannie Mae posts another huge loss

By Lynn Adler

NEW YORK (Reuters) - Fannie Mae on Friday posted a much larger-than-expected second-quarter loss and slashed its dividend more than 85 percent to preserve capital as home loan defaults accelerated in the bleakest U.S. housing market since the Great Depression.

Three weeks after U.S. authorities took sweeping steps to support Fannie Mae and its smaller sibling Freddie Mac, the two largest providers of U.S. home mortgage funding, Fannie said its credit costs will keep rising this year.

Fannie Mae Chief Executive Daniel Mudd said the company would likely boost reserves, but said it had not taken advantage of assistance recently made available by the U.S. Treasury and Federal Reserve Bank.

Fannie also said it will cease buying certain risky mortgages that accounted for nearly half of its credit losses in the quarter and set a year-end target for doing so.

Fannie Mae, whose shares dropped more than 6 percent following the earnings news, said its loss totaled $2.3 billion before preferred dividend payments, or $2.54 per share. It was Fannie Mae's fourth straight quarter of red ink, bringing its cumulative loss over the last 12 months to $9.44 billion before preferred dividends.

The loss reversed a profit of $1.95 billion, excluding preferred dividend payments, from a year earlier. Excluding extraordinary items, the second-quarter loss equaled $2.51 per share, more than two-and-a-half times greater than the average estimate among Wall Street analysts of 98 cents per share, according to Reuters Estimates.

"The key for Fannie and Freddie both, and also for banks, is 'Do they have the capital to get through the next year or so?'" said David Dreman, chairman of Jersey City, New Jersey-based Dreman Value Management, LLC, a large holder of Fannie and Freddie Mac shares.

"Their revenues are up pretty significantly," he added. "So if they can hold, if they are not taken under by a wave of defaults now, it'll be a good business two years out. It looks like they can, but there are a lot of negatives out there too."

The steep second-quarter loss included $5.3 billion in credit expenses stemming from the worst housing market since the Great Depression and follows a loss of $2.51 billion, or $2.57 per share before preferred dividend payments, in the first quarter of 2008.

Mudd told a conference call the company anticipates increasing its loss reserves.

"The housing crisis that we all observe as we drive home every single day continues to strain our results and our capital," he said.

By year's end, Fannie Mae will stop buying Alt-A mortgages, riskier mortgages that require less proof of borrower income. These loans made up about 11 percent of the company's total single-family mortgage credit business, but spurred about half of its credit losses in the second quarter.

Fannie said it has already reduced its holdings and purchases of Alt-A mortgages by 80 percent from peak levels. Far fewer such loans are being originated under tighter lending standards imposed as a result of the subprime lending crisis.

SHORING UP CAPITAL

Fannie Mae and Freddie Mac own or guarantee more than $5 trillion in mortgages, or nearly half of all U.S. home loans.  Continued...