Fannie Mae plunges to $3.6bn loss amid turmoil

Fannie Mae, the US government-chartered mortgage lender, on Wednesday reported a $3.6bn loss for the fourth quarter of 2007, driving its shares to a 12-year low in pre-market trading.

“We are working through the toughest housing and mortgage markets in a generation,” said Daniel Mudd, chief executive.

The company reported a net loss of $3.80 a share for the fourth quarter, much worse than analysts had expected. The compared with a profit of $604m in the year-earlier period and a $1.52bn loss in the third quarter.

The dismal results pushed Fannie’s shares 6.8 per cent lower in pre-market trading and helped drive US stock index futures lower. The shares have fallen more than 30 per cent this year.

Mr Mudd said that while demand for Fannie’s mortgage guarantee business had surged amid mounting stress in the mortgage market, “this positive trend has been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices and extraordinary disruptions in the credit markets.”

The downturn in US house prices that first sparked the crisis in subprime mortgages has since affected higher credit quality mortgages such as those underwritten by Fannie Mae and rival Freddie Mac, which reports its earnings on Thursday. The S&P/Case-Shiller US home price index for the fourth quarter fell 8.9 per cent year-over-year, the largest drop in 20 years.

Rising delinquencies and foreclosures have led Fannie and Freddie to write down the values of securities they own and to increase loss reserves to cover payments on bonds held by investors.

Fannie put aside an additional $2bn to cover credit losses in the fourth quarter in light of late payments and defaults.

The government-chartered mortgage companies were created during the Great Depression to help boost home ownership. They are now trying to provide liquidity to the embattled mortgage market while also tightening underwriting guidelines to protect themselves from further losses.

Fannie and Freddie have come under pressure from regulators and lawmakers in recent months to bolster the housing market, most recently by increasing the size of loans eligible for the businesses. However, losses at the companies have reduced the capital that they need to expand.

To bolster its capital position, Fannie Mae was forced to issue $7.8bn of preferred stock in the fourth quarter. “We will continue to evaluate further avenues to conserve our capital and reduce the impact of market disruptions on our capital base,” said Stephen Swad, chief financial officer.