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Fannie Mae Warns Investors Of Mounting Losses In 2008

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By MARCY GORDON, The Associated Press

Published: December 6, 2007

WASHINGTON - Fannie Mae warned investors Wednesday that its losses would mount next year from bad home loans, even as the mortgage finance company took steps to stabilize its finances.

A day after announcing it would sell stock and cut its dividend, Fannie Mae disclosed in a regulatory filing that its mortgage investments declined by $9 billion in November, compared with the prior month, as it sold some off to raise capital.

Fannie and its smaller government-sponsored rival Freddie Mac have been forced to set aside billions of extra dollars to account for bad loans, eroding their profits at a time when home prices are falling and foreclosures are rising on high-risk mortgages made to borrowers with weak credit histories. Fannie said it expects U.S. home prices to fall by 10 percent to 12 percent from their peak before the housing market can rebound.

In 2008, Fannie expects to lose money on eight to 10 out of every 1,000 mortgages held on its $2.4 trillion book, the company said Wednesday. That would be a steep increase from 2007, when it expects four to six out of every 1,000 mortgages to be money-losers.

The Washington-based company, which finances or guarantees one of every five home loans in the United States, made the disclosure as part of a sales pitch to prospective investors in its planned share offering. Fannie also estimated that its portfolio of mortgages and related securities declined to about $723 billion in November from $732.29 billion in October.

Tuesday, Fannie said it would issue $7 billion in preferred stock this month, and slice its dividend by 30 percent, to 35 cents a share, starting in the first quarter of 2008.

Freddie said if a dividend cut and stock sale it announced last month were insufficient to keep capital levels above government-mandated minimum levels, it would consider reducing its mortgage investment holdings.

Fannie and Freddie have been major sources of funding for the home-loan market by buying mortgages made by banks and other lenders and then bundling them as securities for sale to investors. Industry experts say a reduced role by either could ripple across the housing market.

Fannie shares climbed 66 cents, or 1.88 percent, to $35.84 in midday trading, after losing $1.07 on Tuesday.

The $7 billion in preferred stock to be sold by Fannie will not be convertible to common stock. Converting stock to common stock dilutes the value of outstanding shares and could further depress stock prices. Preferred stock typically pays a higher dividend than common stock and has a stronger claim on a company's assets if it goes bankrupt.

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