Fannie Mae, the largest provider of financing for U.S. home loans, reported a $3.6 billion quarterly loss on Wednesday and said it expects a "significant" worsening of the housing bust.
The government-sponsored enterprise said it will suffer bigger losses on home loans than it forecast just three months ago as the decline in house prices accelerates and sparks more foreclosures.
Falling home prices after years of loose underwriting standards and a speculative frenzy have filtered into even prime loans that make up most of Fannie's business, shocking investors who thought the company was better protected.
"It's going to get worse before it gets better," said Malcolm Polley, chief investment officer at Stewart Capital Advisors in Indiana, Pennsylvania. "The GSEs are really looked to as the last great hope for the housing market."
Losses at Fannie Mae and rival GSE Freddie Mac have constrained their ability to support the housing market that by some measures is in its worst funk since the Great Depression.
Fannie Mae posted a $3.80 per share net loss for the fourth quarter, compared with a profit of $604 million in the year-earlier period. It stock tumbled in November when it report a $1.52 billion third-quarter loss.
Analysts expected the company would post a fourth-quarter loss of $1.39 per share, according to Reuters Estimates.
Fannie Mae said its results were largely driven by a $3.2 billion loss on derivative contracts used to hedge its investment portfolio as interest rates declined.
Rising delinquencies and foreclosures also forced Fannie Mae to write down the value of mortgage securities they own and to increase reserves to cover their guarantees of payments on bonds held by investors.
The company also said it expects a higher rate of homeowners to fall behind on their mortgages. It increased its credit loss ratio forecast to a range of 11 basis points to 15 basis points from the 8 to 10 basis points it forecast in November.
The forecast for the credit loss ratio, or losses as a percent of the home loans it guarantees, was well above 5.3 basis points for 2007 and 2.2 basis points in 2006, Fannie Mae said.
Fannie Mae's report "is disturbing," said Peter Kenny, managing director at Knight Equity Markets in Jersey City, New Jersey. "It confirms the market's expectation, or fear, of another shoe to drop."
The credit-related expenses soared to $3 billion last quarter from $326 million in the same period for 2006. Revenue rose 8.6 percent to $3.1 billion, driven by a 26.4 percent increase in guaranty fee income.
Improvements in the guaranty business have "been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices, and extraordinary disruptions in the credit markets," Chief Executive Officer Daniel Mudd said in a statement.
The report initially drove Fannie Mae shares to a 12-year low at $25.33, but they soon recovered to $28.05, a gain of 4 percent by mid-morning.
Several analysts have warned since last week of the potential of large losses at Fannie Mae and the stock is down slightly from Friday's close.
Washington-based Fannie Mae, which was created in 1938 to boost homeownership, is now struggling to strike a balance between enlarging its business while tightening underwriting guidelines to protect itself from further losses.
Regulators and lawmakers have leaned harder on Fannie Mae and Freddie Mac in recent months to bolster the housing market, most recently by increasing the size of loans eligible for their purchase. However, losses at the companies have squeezed their profits and reduced their ability to expand.
Fannie Mae shares have fallen 33 percent this year through the market close Tuesday, compared with a 3.8 percent drop in the KBW Mortgage Finance index over the same period.