Fannie Sounds a Warning After $2.3bn Quarterly Loss

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, the US's largest mortgage finance company revealed that it set aside $5.3bn to cover credit losses over the three months to June.

In figures released only weeks after the US government legislated for a possible support package, Fannie Mae admitted it could not be sure that it would satisfy statutory capital requirements next year.

"The housing market has returned to earth fast and hard," said its 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 the 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 were established with a mission to broaden American home ownership by making loans more affordable. The companies, which purchase loans from high-street lenders and package them for investors in the debt markets, stand behind more than $5tn 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 by 85% and changing its guidelines to filter out high-risk loans.

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

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

Paul Miller, an analyst at Friedman, Billings, Ramsey Group, told Bloomberg that the figures indicated an increased probability that the government would have to intervene to bail out Fannie or Freddie.

"Neither of these companies have properly provisioned for what we're heading into," he said. "This thing is going to get worse and last longer and deeper than they originally thought."