Fannie Mae Fears for Future After Posting $2.3bn Loss

America's largest mortgage finance company, Fannie Mae, slumped to a quarterly loss of $2.3bn (?1.2bn) after the housing market came down "fast and hard" prompting huge liabilities as borrowers defaulted on home loans.

Outlining the extent of its exposure to the downturn, Fannie Mae revealed that it set aside $5.3bn to cover credit losses over the three months to June.In figures released just weeks after the US government legislated for a possible support package, the company admitted it could not be sure it would satisfy statutory capital requirements next year.

"The housing market has returned to earth fast and hard," said Fannie Mae's chief executive, Daniel Mudd. "In the markets, conditions which many of us had already described as the worst in a generation took a turn for worse."

Fears rippling along Wall Street last month generated headlines about the stability of Fannie Mae and Freddie Mac, the two main guarantors of mortgages in the US.

The two companies, which purchase loans from high street lenders and package them for investors in the debt markets, stand behind more than $5trillion of home loans.

Mudd said the week of July 7, when alarm bells began to ring, was "one of the worst Fannie Mae has experienced on the debt and equity markets" in the company's 70-year history.

"It's been three months since our last [earnings] filing," said Mudd. "It seems even longer."

To cope with the fallout, Fannie is cutting its operating costs by 10%, increasing its guaranty fees, slashing its dividend payout to shareholders by 85% and changing its guidelines to filter out high-risk loans.

Economists worry that a collapse of either Fannie or Freddie could cause turmoil throughout the financial system by effectively closing down a large chunk of the mortgage industry.

The two companies were established with a mission to broaden US home ownership by making loans more affordable.

Fannie's capital balance of $47bn is $9.4bn above a minimum level set by regulators. But the company said volatile conditions meant it had "less visibility" of its likely position in 2009 and was preparing scenarios for breaching requirements as well as conforming to them.

Paul Miller, an analyst at Friedman, Billings, Ramsay & Co, told Bloomberg News the figures increased the probability of the government stepping in to bail out either Fannie or Freddie."Neither of these companies have properly provisioned for what we're heading into. This thing is going to get worse and last longer and deeper than they originally thought," he said.