Posted on 10 May 2010
Fannie Mae will require an additional $8.4 billion in government aid after reporting an $11.5 billion net loss for the first quarter, the latest sign that the bailout of the mortgage investor and its main rival, Freddie Mac, is likely to be the most expensive legacy of the U.S. housing market bust.
Fannie's losses reflected continuing weakness in the housing market and would have been worse without accounting changes that reduced its deficit. The quarterly loss was an improvement from the $23.5 billion loss for the first quarter of 2009 and marked the 12th consecutive quarterly loss for the Washington-based firm.
Over that time, the company has had losses totaling nearly $148 billion, or nearly double its profits for the previous 35 years. The government's tab for Fannie Mae will climb to $84 billion, and its tab for both Fannie and Freddie will reach $145 billion. The government took control of both companies in 2008 through a legal process known as conservatorship as rising losses threatened to wipe out their thin capital reserves.
While many of the nation's biggest banks have repaid their government loans and some are back to racking up big profits, red ink continues to gush from Fannie and Freddie because of their huge exposure to defaulting home loans.
The companies are exposed to a single asset class, holding nearly $5.5 trillion in mortgages and loan guarantees. Unlike many financial companies, they lack profitable sidelines that could be sold off to help dig themselves out of their holes.
Despite their losses, the firms are helping to stabilize the housing market. Fannie, Freddie and the Federal Housing Administration provided guarantees or insurance for 96.5% of home mortgages originated in the first quarter, according to Inside Mortgage Finance, a trade publication. The companies also play a central role in the Obama administration's loan-modification effort designed to avert foreclosures.
Accounting changes reduced Fannie's negative net worth by $3.3 billion. The firm's losses were driven by deterioration in its $3 trillion book of loan guarantees, which accounted for a $12.5 billion loss. Fannie reported modest gains from its $760 billion portfolio of mortgage assets and its multifamily loan-guarantee business.
The company's loan-loss reserves fell to $61 billion from $64 billion three months ago, even as its pool of nonperforming loans grew to $224 billion from $217 billion three months ago.
"If I was the government, I would plead with Fannie or Freddie to reserve far more than they are right now," given the prospect of future home-price declines, said Anthony Sanders, a real-estate finance professor at George Mason University in Fairfax, Va.
But the terms of the government conservatorship, which require Fannie and Freddie to pay an annual 10% dividend on their Treasury draw, could create an incentive to reserve more conservatively. Fannie had to pay the government $1.5 billion in dividends last quarter. "They don't want to raise the reserve levels because in a sense it doesn't matter and it could be perversely damaging to them," says Mr. Sanders.
One possible signal that losses will slow in the coming months: Fannie said that 5.47% of its loans were 90 days or more past due at the end of March, down from 5.59% in February and the first monthly decline in nearly three years.
The earnings report comes as policy makers begin to consider how to revamp Fannie and Freddie. The Obama administration wants to defer legislative action until next year, but Republicans are agitating to accelerate a revamp of the companies in the financial-overhaul legislation moving through the Senate.