Fannie Mae, the government-controlled company seen by President Barack Obama as a key conduit to stabilize U.S. housing, on Thursday reported a $25.2 billion fourth-quarter loss, forcing it to draw capital from the Treasury.
The housing finance giant said it needs $15.2 billion under a senior preferred stock purchase agreement with the Treasury to fund a deficit in its net worth, which came as the volume of bad home loans soared and falling interest rates hurt the value of its derivatives.
Fannie Mae’s loss in the fourth quarter grew sevenfold from the $3.56 billion in the year-ago period. For all of 2008, it lost $58.7 billion.
"We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth," Fannie Mae said in a statement.
Fannie Mae said the deterioration in housing and credit markets reduced the fair value of its net assets to a negative $105.2 billion in December from $35.8 billion at the end of 2007.
Fannie Mae and rival Freddie Mac are seen as crucial tools to the Obama administration’s housing rescue plan to help lower mortgage costs and prevent foreclosures for as many as nine million homeowners. But the companies have been severely weakened themselves as they underestimated the degree of the housing downturn that has accelerated since the market peaked in mid-2006.
Total delinquent loans nearly doubled last quarter to $119.2 billion from $63.6 billion in the third quarter.
"These Fannie Mae (results) reinforce the idea that housing has not bottomed," said Bret Barker, portfolio manager at Metropolitan West Asset Management in Los Angeles.
Fannie Mae in January expected to draw up to $16 billion from the Treasury. Freddie Mac is expecting to ask for up to $35 billion, after taking $14 billion from the Treasury in 2008.
The White House last week moved to boost confidence in Fannie Mae and Freddie Mac by doubling Treasury capital backstops to $200 billion each.
The companies have been operating in conservatorship under their regulator, the Federal Housing Finance Agency, since September. Their equity has been virtually wiped out, but the government has committed to supporting the debt issuance with an effective guaranty.
Fannie Mae and Freddie Mac use the debt to support mortgage investment portfolios that under Obama’s plan may grow about another $100 billion by year end, to $900 billion each. They also guarantee loans in mortgage-backed securities.
As Fannie Mae’s portfolio increased and funding costs fell, net interest income increased 14 percent quarter-over-quarter, to $2.7 billion. Guaranty fee income surged 89 percent to $2.8 billion, it said.
But lucrative new business for the company was no match for a 30 percent increase in credit-related expenses to $12 billion last quarter. Current loss estimates required a "substantial addition" to loss reserves to $24.8 billion, from $15.6 billion in the third quarter and $3.4 billion a year earlier.
Falling interest rates last year led to a $11.4 billion unrealized loss on derivatives used to hedge mortgages.
"These are the same sorts of losses seen in the third quarter, only much larger," said Jim Vogel, a strategist at FTN Financial in Memphis, Tennessee. "There’s no random loss here" which could help the company make more accurate projections about the future, he said.
