Fannie Mae loses $2.3B in quarter, slashes dividend

WASHINGTON -- The largest U.S. buyer and backer of home loans, is raising fees, which will be passed onto borrowers as higher interest rates, and abandoning "Alt-A" borrowers because those loans are defaulting at an alarming rate. These high-risk loans — made to borrowers with solid credit but little proof of their income, or small or no down payments — made up about 11% of Fannie's portfolio but accounted for more than half of its credit losses in the quarter.

"The housing market has returned to earth fast and hard," said Daniel Mudd, Fannie Mae's president and chief executive.

And it appears more bad news is ahead.

"Volatility and disruptions in the capital markets became even more pronounced in July," Mudd said.

Fannie Mae said Friday it lost $2.3 billion, or $2.54 a share, for the quarter that ended June 30. The loss, the company's fourth-consecutive quarter of red ink, compares with profit of $1.95 billion, or $1.86 a share, in the period last year.

Analysts surveyed by Thomson Financial had expected a loss of just 68 cents a share.

While revenue rose to $3.97 billion from $1.42 billion a year earlier, Fannie Mae's losses from defaulting mortgages skyrocketed.

Disappointed stockholders sent Fannie Mae's shares down 9.0%, or 90 cents, to $9.05.

Investors continue to worry that Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, will be swamped by losses from the mortgage crisis and won't be able to raise enough capital.

Together, Fannie Mae Freddie Mac, hold or guarantee nearly half of outstanding U.S. mortgage debt.

To avoid a crisis, the government stepped in last month. Under the housing bill signed by President George W. Bush last week, the government may boost increase lines of credit to the companies or buy their stock.

To preserve cash, Fannie Mae slashed its dividend to 5 cents a share from 35 cents a share.