Fannie Mae profit down 36% in 2006

Fannie Mae fnm, the largest U.S. buyer and guarantor of home mortgages, reported Thursday that its profit dropped 36% in 2006 and said it expects higher delinquencies and credit losses this year from the turbulence in the mortgage market.

The government-sponsored company, which finances or guarantees one of every five home loans in the United States, said it earned $4.1 billion, or $3.65 a share, in 2006, down from $6.35 billion, or $6.01 a share, in 2005.

The decline in profit in 2006 was expected, mainly because of reductions in interest income and ballooning costs from Fannie Mae's reworking of its accounting following a $6.3 billion scandal that came to light in September 2004.

Last year's earnings also were eroded by increased credit losses from the decline in home prices — especially in parts of the Midwest, the company said.

The company has said that volatility in earnings is expected to continue from quarter to quarter amid changes in interest rates.

This year, Fannie Mae said it expects increased credit losses from its purchases of higher-risk mortgages. Such increases are likely to reduce 2007 earnings "and also could adversely affect our financial condition," the company said.

"While we do expect our credit-loss ratio to increase in 2007 from continuing strain in the housing market, we believe Fannie Mae is well positioned to weather the turmoil in the mortgage market," President and Chief Executive Daniel Mudd said in a statement.

As the stress in the mortgage market has deepened in recent weeks, Democratic lawmakers and other officials have called on federal regulators to allow Fannie Mae and its government-sponsored sibling, Freddie Mac fre, to take a bigger role in the market. This would require easing restraints on their investment holdings.

Last Friday, regulators rejected Fannie Mae's request for a 10% increase in the mandated ceiling on its mortgage debt holdings, now set at around $727 billion, as a way to pump cash into the struggling mortgage market.

The decision by the Office of Federal Housing Enterprise Oversight capped a week of speculation over what the regulators might do.

Fannie Mae's reckoning for 2006 marked progress by the company toward catching up on its financial reporting. Fannie Mae has been remaking itself as it recovers from the accounting scandal — which prompted federal regulators to sanction the company and impose restraints on its operations and debt load.