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Fannie Mae, Freddie Mac CEOs Warn Of Greater Losses In 2008

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By MARCY GORDON, The Associated Press

Published: December 12, 2007

WASHINGTON - The chief executives of Fannie Mae and Freddie Mac on Tuesday warned that their ailing mortgage-finance companies will suffer further in 2008 because of a weakening housing market and rising home-loan defaults.

Freddie CEO Richard Syron said the government-sponsored company could lose an additional $5.5 billion to $7.5 billion over the next few years from soured home loans.

"I honestly think it's going to get tougher before it gets better," Syron said in a discussion with financial analysts in New York. His company has logged about $4.5 billion in projected losses during the first nine months of this year.

Freddie's shares fell $3.73, or 10.6 percent, to finish at $31.31 in trading Tuesday.

Fannie CEO Daniel Mudd, also meeting with the analysts, forecast "a very tough 2008" and continued weakness in home prices through 2009. He called the wave of defaults and foreclosures this year the worst mortgage crisis "in recent memory."

The Washington-based company, which lost $1.4 billion in the third quarter, sold $7 billion in preferred stock last week to raise capital to stabilize its finances. Mudd said Tuesday that Fannie has no further plans for such sales over the next year. He said the company could raise added capital through sales of mortgage investment holdings, increased fees on mortgages and other measures.

Syron said that although the mortgage crisis has brought a rising wave of foreclosures into public view, less evident have been "pictures of people standing with furniture on the lawn" after being evicted from their homes. "As that begins to happen, and it will happen, I am afraid of the impact that this has," Syron said.

The chief executives' remarks came a day after Freddie and Fannie said they would change their criteria for purchasing delinquent home loans they've guaranteed, to reduce the number they buy from investors.

On Tuesday, McLean, Va.-based Freddie announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie. On a $300,000 mortgage, the new fee translates to an extra $750, which is expected to be passed on to homeowners, though the companies aren't saying. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

A new plan orchestrated by the Bush administration to help distressed homeowners with a five-year freeze in mortgage rates provides relief only to borrowers with credit scores below 660.

Fannie and Freddie, which own or guarantee about two-fifths of U.S. home-mortgage debt, have cut dividends and sold billions of dollars of special stock recently to buttress finances after posting stunning third-quarter losses. They have been forced to set aside billions of extra dollars to account for bad home loans, eroding profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

Shares of Fannie, the No. 1 financer and guarantor of U.S. home loans, declined $2.62, or 7.1 percent, to $34.29.

The two companies have been a major source of funding for the home-loan market. They buy mortgages made by banks and other lenders and bundle them as securities to sell investors. They've been pressured to step up their role to help stabilize the mortgage market in the worst housing slump in more than 20 years.

Freddie lost $2 billion in the third quarter. Syron said Tuesday results aren't expected to be better in the October-December quarter.

"We've reported really ugly numbers; let's face it," Syron said.

Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and cut its quarterly dividend in half.

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