Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected Thursday to report a $1.5 billion fourth-quarter loss, according to an average of Wall Street estimates.
Under a previous agreement with federal regulators, the timely filing of Fannie's and Freddie's financial results triggers the removal of an investment-portfolio cap placed in the aftermath of a multibillion-dollar accounting scandal. Analysts said the impact will be limited, however, because of the large cash cushion Fannie and Freddie must maintain, and the difficulty lenders are having in raising funds of their own.
Fannie, which gave a pessimistic housing outlook for 2008, said close to 90 percent of its fourth-quarter losses were tied to hedging investments it made based on the assumption that falling interest rates would cause mortgage values to appreciate.
Shares of Fannie, the largest U.S. buyer and backer of home loans, swung widely after the report was released, initially falling by more than 5 percent and later rising by roughly 15 percent. The stock was up more than 4 percent around midday.
Fannie's $3.56 billion quarterly loss contrasts with a profit of $604 million in the same period a year earlier. The loss was equivalent to $3.80 a share, far steeper than the $1.24-per-share loss forecast by analysts surveyed by Thomson Financial.
"We are working through the toughest housing and mortgage markets in a generation," the company's president and CEO, Daniel Mudd, said in a statement. He said the company's losses reflected "the significant decline in home prices in a number of large regional markets and the growing number of borrowers struggling with their mortgages."
Mudd called 2008 "another tough year."
The Office of Federal Housing Enterprise Oversight said that on March 1 it will remove the combined $1.5 trillion cap on Fannie's and Freddie's mortgage holdings.
However, a bigger constraint on the companies' ability to buy mortgages has been a government mandate that requires Fannie and Freddie to keep 30 percent more capital in reserve than the minimum legal requirement, said Guy Cecala, publisher of Bethesda, Md.-based mortgage industry newsletter Inside Mortgage Finance. That restriction, which the government is considering decreasing gradually, means the company would have to boost its reserves by billions more to be able to make more loan purchases, he said.
Sen. Charles Schumer, D-N.Y. called the decision to eliminate the portfolio limits "long overdue" and also said the capital requirement should be lifted immediately.
The government "clearly is responding to pressure to open up Fannie and Freddie's ability to buy loans," said Bob Walters, chief economist with Quicken Loans, a mortgage company based in Livonia, Mich.
In late morning trading, shares of Fannie rose $1.28, or 4 percent to $28.25. Shares of Freddie, which releases earnings on Thursday, gained 55 cents, or 2 percent, to $25.76.
In addition to having to set aside an additional $2 billion in the fourth quarter for soured loans, Fannie also saw its profits eroded by $3.2 billion in losses from derivatives, the complex financial instruments it uses to hedge against swings in interest rates.
Through these investments, known as "interest rate swaps," Fannie Mae tries to hedge against the risks of rising or falling interest rates. The mortgages on the company's books tend to rise in value when interest rates drop, and vice versa. But that bet hasn't worked out of late, as interest rates fell in the fourth quarter and the value of mortgages held on the company's books has fallen as well.
Fannie said Wednesday it expects U.S. home prices to fall by 5 percent to 7 percent this year. It earlier forecast a decline of 4 percent to 5 percent. Fannie Mae said it expects to lose money this year on 11 to 15 of every 1,000 mortgages held on its $2.4 trillion book, up from its earlier expectation of eight to 10 and a steep increase from four to six in 2007.
Home prices -- even those backed by lower-risk mortgages -- are dropping across much of the nation, and banks are repossessing more every day. Most experts say the decline won't hit bottom for another year and only after excess inventory is sharply reduced and credit markets improve. U.S. home prices fell 8.9 percent in fourth quarter of 2007 compared with a year earlier, according to an industry index released Tuesday, marking the steepest decline in the index's 20-year history.
Fannie and Freddie are the largest purchasers and backers of U.S. home mortgages, together holding or guaranteeing about $4.9 trillion in home-loan debt.
AP Business Writer Alan Zibel in Washington contributed to this report.
Copyright 2007 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.
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