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Wednesday, February 27, 2008

Fannie Mae: Another Shoe Drops

Another shoe has dropped. Fannie Mae reported getting their ass handed to them. Pre-market, the bid is at a new 10+ year low. Since economic conditions are only just now accelerating to the downside, expect far worse.

Fannie Mae will continue to have trouble with both credit losses and capital levels. Fannie Mae is now considering cutting or eliminating their dividend.

Freddie Mac is reporting next. You can probably guess how that will turn out...

Fannie Has $3.55 Billion Fourth-Quarter Loss Amid Housing Slump: “Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion loss in the fourth quarter as the failure of homeowners to keep up with their mortgage payments dragged down the value of the company's assets.

The net loss was $3.80 share, compared with profit of $604 million, or 49 cents, a year earlier, Washington-based Fannie Mae said in a statement today. Excluding some items, the per-share loss was $3.79, compared with the $1.20 average estimate of 12 analysts in a Bloomberg survey.

An almost doubling in home foreclosures and an economy teetering near recession are reducing the value of the $2.3 trillion of mortgages the government-chartered company owns or guarantees. Chief Executive Officer Daniel Mudd said last month that Fannie Mae faces a “tough year.” The slump may force the company, which sold $7 billion in preferred stock in December, to raise more money, said Paul Miller, an analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia.

Fannie Mae “will continue to have trouble with both credit losses and capital levels,” said Miller, who on Feb. 25 downgraded the stock to “underperform.” Credit impairments will exceed company estimates and “the Street's expectations.”

The company, which accounts for at least one in five home loans, has lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their recommendations to “sell” in the past week on concern that falling home prices will restrict earnings.

Fannie Mae's loan loss ratio was 4 basis points during the nine months ended Sept. 30. Fannie Mae in November estimated credit losses this year would double to 8 basis points to 10 basis points.

Miller says Fannie Mae's credit losses will rise to a range of 15 basis points to 25 basis points this year and in 2009. Howard Shapiro, an analyst at Fox-Pitt Kelton Cochran Caronia Waller in New York, forecasts a range of 11 basis points to 14 basis points. A basis point is 0.01 percentage point.

Freddie Mac is scheduled to report tomorrow. The McLean, Virginia-based company had losses of $2.02 billion in the third- quarter and $480 million in the year-earlier fourth quarter.”

Fannie Mae, by reporting timely audited financial results for the first time since 2004, met conditions for the removal of a federal limit on its $724 billion in mortgage investments imposed after a $6.3 billion overstatement of earnings. Its portfolio of home loans and mortgage-backed securities is one of its two main sources of profit.

Fannie Mae needs to complete the final items on a list of 81 changes in accounting, internal controls and governance in order to shed a requirement that it set aside 30 percent more reserve capital than normal, the company's regulator told a Senate committee on Feb. 8.”


Ben Bittrolff said...

Awesome. GSE lending cap limits raised. Buy everything in sight. Wooooohooo. All our problems are solved forever. (Please note my sarcasm.)

Raising the caps just allows Fannie and Freddie to load up crap jumbo mortgages from places such as California. FNM and FRE now up on that news.

Like I said, simply insane.
I gotta say though, I love daytrading.

Anonymous said...

Wow, crazy day. Wheat futures limit up. Oil over $101.

Increasing lending caps at FNM and FRE is really bad idea.

Anonymous said...


Great posts lately, I'm loving the content!

Can we get an update to your 'Dollar Smile' theory? :-)

Ben Bittrolff said...


The 'Dollar Smile Theory' is coming under some serious stress. The US dollar is now testing lows again. Ok, more than just 'testing'...
Failure here, could be problem (for the economy). Oil is already at $100+ and Gold at $950+.

eda said...


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