Fannie Mae loses $2.3B in quarter, slashes dividend

Mortgage finance company Fannie Mae FNM swung to a second-quarter loss that was more than triple what Wall Street expected as conditions in the housing market continued to deteriorate.

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.

But the worst of the pain may be over by year-end, the company said, while warning investors of significant losses this quarter and next as it tries to unload foreclosed homes and restructure loans made to borrowers in 2006 and 2007.

Even as the subprime mortgage market collapsed last year, the industry kept making risky Alt-A loans.

They made up about 15% of all loans in the first half of 2007, up from 13% in all of 2006, according Inside Mortgage Finance.

While Fannie Mae and Freddie Mac generally had higher standards for lenders than the subprime mortgage companies that started to go belly-up last year, the duo lowered their standards during the housing boom and bought securities linked to riskier loans.

If Freddie Mac follows Fannie Mae and stops buying Alt-A loans, "it means that market is not going to exist at all. It's barely hanging on now," said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication.

For homebuyers who don't have a 20% down payment, there are few options but loans insured by the Federal Housing Administration, which requires a minimum of 3% down but full proof of income.

Fannie Mae booked $5.3 billion in credit expenses, including a $3.7 billion addition to its loss reserves. Loans more than three-months past due more than doubled last year's level to 1.36%.

To speed up the sale of foreclosed properties, Fannie Mae is opening offices in California, Florida and other hard-hit areas to sell off foreclosed properties in bulk.

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