Struggling mortgage finance giant Fannie Mae unveiled on Friday a steeper-than-expected quarterly loss and announced dramatic measures to weather the worst US housing slump in decades.
Fannie Mae reported a net loss of US$2.3 billion in the second quarter that followed a first-quarter loss of US$2.2 billion.
The second-quarter loss of US$2.54 per share was more than triple the US$0.69 forecast by most analysts.
Fannie Mae plans to slash its dividend, raise fees and end home loans known as Alt-A, considered riskier than prime loans but less risky than the subprime loans at the epicenter of the housing market crisis.
The company blamed the second-quarter losses mainly on a sharp hike in its provision for credit losses in the deepening housing slump.
The market has been in freefall since early 2006 after the collapse of a speculative housing boom fed by easy credit.
The government-sponsored, shareholder-owned firm and its twin Freddie Mac underpin US$5.2 trillion in home loans, nearly half the US housing market.
Freddie Mac reported on Wednesday a second-quarter loss of US$821 million, also more than triple market expectations.
The US federal government last week threw a financial lifeline to the two firms whose stocks have plummeted as investors worry about their solvency. Congress estimates it could cost US taxpayers US$25 billion.
“Our second-quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Daniel Mudd, Fannie Mae’s president and chief executive.
Mudd noted the company had already taken a number of steps, including raising more than US$7 billion in additional capital, in the second quarter, “to help us manage through the most difficult US housing market in more than 70 years.”
Given the increased volatility in the capital markets and the deteriorating credit conditions the company has experienced last month, he said, “we anticipate further increases in our combined loss reserves.”
The company plans to slash its third-quarter dividend from 35 cents to five cents, reduce annual operating costs by 10 percent by the end of 2009 and eliminate the acquisition of Alt-A loans by Dec. 31.
Defaults are spiking on the popular Alt-A loans — typically given to borrowers with clean credit who may have little or no money for a down payment or cannot fully prove their income source — amid tighter credit and falling home values.
Fannie Mae said it continues to expect home prices to fall between 7 percent and 9 percent this year.
However, it noted the market trend was “moving toward the high end of those ranges.”
Shares in Fannie Mae tumbled 9 percent to close at US$9.05 in New York; Freddie Mac edged up 0.7 percent to close at US$5.90.
Frederic Dickson, analyst at DA Davidson & Co, said the grim news from the financial sector this week was darkening hopes for an economic recovery anytime soon.
Losses from insurer AIG, Fannie Mae and Freddie Mac, as well as Citigroup and Merrill Lynch’s agreements to repurchase billions of dollars’ worth of tainted securities “raise the specter that we are not out of the woods yet despite some better-than-expected earnings results, although still down significantly from last year, in the second quarter,” he said.
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