Fannie, Freddie Losses to be Steep, But a Little Better


Fannie Mae and Freddie Mac, reeling from the deterioration in the housing market, will likely post steep losses for the first quarter, but the two largest home funding companies are expected to escape previous record losses.

Slumping house prices and rising foreclosures, even for high-quality loans that comprise the bulk of business at the two federally chartered companies, have eroded their income.

Losses were likely tempered, however, after the two raised their fees and as the credit crunch drove many of their rivals to the sidelines.

The first quarter, however, held no relief for housing.

The Standard & Poor's/Case-Shiller home price index of 20 metro areas fell 2.6 percent in February, for an annual drop of 12.7 percent. Foreclosure filings surged 23 percent in the first quarter, and were more than double a year earlier, according to RealtyTrac.

"It's probably the most challenging environment that they've seen in their histories," said Moshe Orenbuch, equity research managing director at Credit Suisse in New York.

Rising delinquencies and foreclosures have forced both companies to write down the value of mortgage assets they own and boost reserves to cover payment guarantees on bonds held by investors.

Fannie Mae , whose shares have tumbled 46 percent over the last 12 months, will be first out of the chute when it reports first-quarter results on Tuesday. Freddie Mac , whose shares are down 54 percent over the past 52 weeks, is scheduled to post its results on May 14.

Wall Street analysts see Fannie Mae reporting a $2.02 billion loss, $1.48 per share, according to Reuters Estimates.

The projected loss compares with net earnings of $826 million, or 85 cents per share, a year earlier. But in last year's fourth quarter, the largest source of US home funding had a record $3.6 billion loss. Sweeping losses on derivative contracts used to hedge its investment portfolio drove the downturn.

First-quarter derivatives losses are apt to be large for the two companies, given the difficulty they likely had in estimating their interest rate exposure at a time when the credit crunch whipsawed bond markets, analysts say.

Freddie Mac is expected to report a $920.6 million first-quarter loss, or $1.22 per share, according to Reuters Estimates. In the year-ago quarter, it lost $211 million, followed by a record $2.5 billion loss in the final quarter of 2007.

Profits Ahead?

Going forward, profitability will be helped by an agreement with their regulator, the Office of Federal Housing Enterprise Oversight, that loosened restrictions on how much capital the two lenders must hold. That freed Fannie and Freddie to buy up to $200 billion more mortgages.

As part of the deal with their regulator, the companies also pledged to raise fresh capital. Analysts say it would be best for each to raise at least $10 billion of preferred shares or common stock, but they expect far smaller amounts initially.

Once the latest quarterly results are published, the companies can begin to raise capital, said Rajiv Setia, director of U.S. fixed income strategy at Barclays Capital.

"There's clearly tremendous appetite for preferred shares, so I don't think raising capital is going to be an issue at all."

The challenge is doing it without diluting existing shares or hurting the companies' credit quality.

"The question really is that if they do more preferred, can they get away with it from a rating agency perspective and not get downgraded on the existing preferred?" Setia said.

Fannie Mae and Freddie Mac have have also taken a series of steps, including raising fees they charge for their guarantees on mortgage bonds, to bolster profits.

"From a longer term perspective, the fundamentals of the business are improving, both on the guarantee side where they are raising fees, as well as on the portfolio side where growth has resumed, and they are adding mortgage assets at very attractive spreads," said Setia.