Fannie Mae lost $2.19 billion in the first-quarter, about four times that of average analyst expectations. And the largest U.S. mortgage company will now raise $6 billion in order to continue to fund operations.

The “severe weakness” in the housing market was worse than expected in the quarter and will continue this year, Chief Executive Officer Daniel Mudd said in a statement….Fannie Mae said home price declines this year are exceeding its estimates and attributed the larger share of its credit losses to certain types of loans in California, Florida, Michigan and Ohio. The government-chartered company, which sold $7 billion of preferred stock in December, may need as much as $15 billion to cope with the delinquencies and foreclosures, analysts said.

And while Fannie Mae’s portfolio (and collateral) continues to deteriorate, the OFHEO has said “it will lower requirements for surplus capital to 15 percent from 20 percent once the money is raised, enabling Fannie Mae to buy more mortgages. The limit may be reduced to 10 percent by September if Fannie Mae continues to retain excess capital….”
Fannie Mae to Raise $6 Billion in Capital After Loss [Bloomberg]

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Comments from “Plugged-In” Readers

  1. Posted by tony

    So… they are losing money hand over fist after just barely putting an accounting scandal “behind” them, and now are being given more rope to over extend themselves because nobody else wants to lend in a crappy environment, all the while the Fed looks the other way while inflation soars in 1Q08…
    Why, as a prudent, non-overextended, non-housing-boom-buyer, do I feel like I’m about to get hosed again?
    If the Fed doesn’t move to get inflation under control quickly, I (and others) will have no choice buy to buy (some sort of a real asset) before our cash is significantly devalued. This is getting rather ridiculous, no?

  2. Posted by Anonymous

    So much for the theory that this is just a subprime mortgage crisis.

  3. Posted by charliemarlowe

    FNM stock is up 4% today…..was the market expecting much wose?

  4. Posted by Dude

    So Bernanke made a speech last night at Columbia. Calculate Risk highlighted it, the transcript can be found here:
    http://www.federalreserve.gov/newsevents/speech/Bernanke20080505a.htm
    This ties in well to the Fannie story – follow the link and click through the charts he used, which show mortgage delinquencies nationwide over time. Figures 1, 2, and 3 tell the whole story.
    I agree that it’s frustrating, because policy makers still don’t seem to get it. Research has already demonstrated that the sharp rise in foreclosures is not being driven entirely by adjusting mortgages. It’s not a subprime issue. And it’s not contained. People with good credit are walking away from mortgages they can afford because prices are falling, and will continue to fall until they reach equilibrium with fundamentals like wages and rents. Put simply, the bubble is deflating.
    Hey, anyone else see the recent article on Jose Canseco? The “millionaire many times over” recently walked away from a $2.5 million mortgage because it made no sense to keep paying. Maybe Bernanke and Congress can come up with a way to keep Jose in his home. I’m sure the taxpayers won’t mind covering the tab on that one:
    http://www.forbes.com/facesinthenews/2008/05/02/jose-conseco-foreclosure-face-markets-cz_md_0502autofacescan03.html

  5. Posted by Foolio

    @Tony:
    Consider hedging against devaluation by investing overseas. This can take many forms, besides currency plays, such as investing in foreign companies or even domestic companies with significant international exposure/growth.
    Also, if you absolutely want to put some money into the U.S. real estate market, someone on a previous thread wisely suggested REITs.

  6. Posted by tipster

    Column 1, Page C1 of today’s WSJ (published last night) said the street expected about a $2Bil loss, right around where they were.
    I don’t know what the source of the 4X loss that Bloomberg reported, but their loss seemed in line with expectations, and was lower than the loss last quarter, so the stock should be up from yesterday.

  7. Posted by view lover

    Foolio, no offense, I’m sure you know what you are doing with your finances. However, most average people have no clue about sophisticated investing, myself included. For us, we rely on sound fiscal policies, which this particular administration is the one without the clue.

  8. Posted by Foolio

    @view lover:
    No offense taken; my point was that even the unsophisticated can invest fairly simply in inflationary hedges in this economy, and that there’s no need to buy into what many feel is a deflating RE bubble.

  9. Posted by ex SF-er

    Why, as a prudent, non-overextended, non-housing-boom-buyer, do I feel like I’m about to get hosed again?
    because you are going to get hosed again.
    If the Fed doesn’t move to get inflation under control quickly, I (and others) will have no choice buy to buy (some sort of a real asset) before our cash is significantly devalued. This is getting rather ridiculous, no?
    this is the plan. the Fed is hoping to drop real rates on safe investments so low (negative rates) that it FORCES prudent people to invest in more risky assets. of course, they’re really hoping people invest in stock market and homes.
    unfortunately, the Fed can’t control where people throw their money… so a lot of people are buying commodities and oil and gold.
    Tipster:
    you are the only person I’ve heard who wasn’t surprised by the fact that Fannie lost so much AND has to go back to the trough again (diluting it’s shares).
    Even on CNBC (which I’m watching right now) they’re having a hard time explaining why Fannie is doing as well as it is.
    Fannie:
    -lost $2.57/share (expectations were for $0.81/share loss)
    -cut it’s dividend (a suprise)
    -stated it will raise $6B (which will dilute current shares)
    -expects “significant weakness” in housing for 2008 AND 2009, with hopeful improvement by 2010
    and yet up 8% on the day?
    it’s back to the meme “well, that must be the last of it, it can only get better from here”
    classic bear market rally.
    (disclosure, I am short financials and am going to add more short exposure right now)

  10. Posted by ex SF-er

    Future mortgage rates should be interesting given Fannie’s results.
    I would guess that they will be forced to raise their fees and also their risk spread premium in order to attempt to stay in business.
    this could mean HIGHER mortgage rates going forward, perhaps even if the Fed drops the Fed Funds Rate (we’ve already seen this though-the Fed drops rates but it doesn’t flow through to mortgages much)

  11. Posted by Anon

    Amazing performance from a company that should have been delisted for failing to report.

  12. Posted by San FronziScheme

    ex SF-er,
    I think the Fannie Mae issues will not cause the rates to go up in the short term.
    What the Federal authorities are doing to FNM is basically allowing them to take on more risky loans for cheaper interest rates and this for the sole purpose of rebalancing the supply-side of the debt market. FNM does not need to raise rates in the “anything goes” culture. They’ll bleed money to death and will be bailed out by our tax dollars in the end.
    What they are doing will be costly for taxpayers: increasing risk at a time when no one knows what the mark-to-market is for some markets while at the same time lowering interest income by artificially maintaining low lending rates. No real company can be managed that way for very long since the collapse of the New Economy (RIP).
    They’ll have containment of the crisis for the next 6-12 month, pushing back the problems by compounding bad debt into worse debt. Until FNM becomes virtualy insolvent and goes to the cash-cow of last resort: me and you.

  13. Posted by ex SF-er

    Fronzi:
    I disagree…
    Fannie is HEMORRHAGING cash.
    the estimated value of net assets was $35.8 billion at end of December 2007 and is now $12.2 billion for end of March 2008 (per their report today)
    although I agree they will likely be the biggest bailout of all time, I also think that the goal is for them to survive longer than 6-12 months. if they continue losing cash at this rate they won’t make it that long.
    there is no other game in town except Fannie/Freddie/FHA. (Fannie/Freddie backed 81% of mortgages last quarter I believe-sorry heard on CNBC so this number may be huge error) So they have to survive for now.
    Later? yep, big bailout. get your wallet ready.

  14. Posted by San FronziScheme

    In theory, they’re in the “too big to fail” club. Regulators and market makers alike are using them to make up for the market shortcomings and keep the “cheap-ish” money flowing. But the way things are going, they’ll be be asking for a bailout really soon.
    http://www.nytimes.com/2008/05/06/business/06fannie-web.html?_r=2&adxnnl=1&oref=slogin&partner=rssnyt&emc=rss&adxnnlx=1210100625-wwHPUEY0M8vvPgPlYGBzlQ&oref=slogin

  15. Posted by jimmythekid

    2.19 billion loss? This “loss” is due primarily in the write down of assets. These guys are writing down everything to zero. They now have free money to smooth their earnings going forward. Very bullish which is why the stock is up!! http://finance.yahoo.com/q?s=fnm

  16. Posted by NoeValleyJim

    If there ever was an institution “too big to fail” it is Fannie Mae. This is why the market timers and pessimists are wrong. President Obama will undoubtedly end the Iraq War and put the extra tax money freed up to work on infrastructure projects, boosting the economy some more.
    When did you sell your SF investment properties SFS?

  17. Posted by San FronziScheme

    They were not SF properties but overseas. But to reply your question I unloaded from mid 2005-2007. No debt, happy as a clam and looking forward scooping property in the nicest city I have seen so far. My only concern is rent control. The entry price point has to be really low to make any rental investment worthwhile.
    By the way, I’ve seen there’s a foreclosure auction for a house in a decent part of upper Noe next week. 869 Alvarado, according to PropertyShark.com. 1.497M+ in outstanding balance. It’s the lower end price of a house around there but I was surprised to see a foreclosure in my Nabe.
    Obama, Hillary or McCain, The national housing crisis is structural and still has to fully unwind.

  18. Posted by K10

    @ jimmythekid
    So you think that when Fannie Mae writes its assets down to zero, they will “free up money”? Fannie Mae has close to $1 trillion dollars of assets on its balance sheet, with equity of around $44 billion at year end (obviously less now since they lost money again). If Fannie “writes its assets down to zero” it would be looking deep into the abyss of a trillion dollar hole. The company is extremely leveraged. Leveraged institutions can’t write down assets to zero without going bankrupt. Furthermore, nearly $1 billion of the write-downs taken this quarter came from its Alt-A portfolio, which the company admits is bleeding cash at a higher rate than anticipated. Fannie has an Alt-A portfolio of $344.6 billion. Remember that Alt-A loans are those given to lenders with high credit ratings but little to no documentation. Maybe the stock rallied on the earnings news, but so did Bear Stearns about two weeks before it went bankrupt.

  19. Posted by Michael L.

    In resposne to K10 – nice…

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