Aug. 9, 2008
Fannie Mae Reports a Loss of $2.3 Billion in Second Quarter of 2008
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
Washington, DC (HNN) – Fannie Mae (FNM/NYSE) on Friday, Aug. 8, 2008 reported a net loss of $2.3 billion, or ($2.54) per diluted share, in the second quarter of 2008, compared with a first quarter 2008 net loss of $2.2 billion, or ($2.57) per diluted share. Results were driven primarily by an increase in the provision for credit losses that more than offset higher revenue and fair value gains.
“Our second quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Daniel H. Mudd, president and chief executive officer. “Fannie Mae is providing stability and liquidity to the housing market in the United States, and we will continue to play a key role as the market recovers from this cycle. We have already undertaken a series of initiatives, including raising more than $7 billion in additional capital in the second quarter, to help us manage through the most difficult U.S. housing market in more than 70 years."
“Volatility and disruptions in the capital markets became even more pronounced in July. In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves," Mudd added. "Given this volatility and the build-up of our reserve, as well as the uncertainties inherent in the U.S. economy and the housing market, we are taking a series of additional actions that reflect our ongoing focus on conserving and enhancing our capital, as well as managing our credit risk through the balance of this cycle.”
Fannie Mae, formally known as Federal National Mortgage Association, is a government sponsored enterprise (GSE) of the U.S. It is a stockholder-owned corporation authorized to make loans and loan guarantees.
Fannie Mae is the leading market-maker in the U.S. secondary mortgage market, which helps to replenish the supply money for mortgages and enables money to be available for housing purchases. Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) own or guarantee about half of the U.S.'s $12 trillion mortgage market. As a result, the corporations were affected particularly hard by the housing meltdown in late 2007 and early 2008.
Mudd said Fannie Mae is taking the following actions:
Capital Conservation and Enhancement
1. Reducing the common stock dividend from $0.35 per share to $0.05 per share, effective for the third quarter, to preserve $1.9 billion in capital through 2009.
2. Reducing annual operating costs 10 percent by year end 2009 as the company drives the strategic priorities of credit risk management and revenue generation. Administrative expenses will have already been reduced approximately 35 percent, from $3.1 billion in 2006 to an estimated $2.0 billion in 2008.
3. Increasing our guaranty fees, including a 25 basis point increase in our adverse market delivery charge, as well as other risk-based pricing changes, announced this week.
4. Managing the balance sheet to ensure the most efficient use of capital. Providing market liquidity will be the priority for our portfolio activities, and purchases will be concentrated in high-spread assets to generate the maximum amount of revenue per dollar of risk capital. As a result, the company will balance profitable portfolio growth opportunities in the near term with prudent capital conservation through the current housing cycle.
Credit Risk Management
1. Improving underwriting guidelines to eliminate higher-risk loans. Over 60 percent of our losses have come from a small number of products, but especially Alt-A loans. Through our recent underwriting changes, the volume of these products has declined more than 80 percent from their peak levels. We have already made underwriting changes to mitigate risk characteristics that drove those losses. After considered analysis, we will eliminate newly originated Alt-A acquisitions by year end.
2. Increasing our workout ratio from approximately 50 percent in 2007 to 56 percent in the first half of the year. The company has set a workout ratio goal of 60 percent by year end, reflecting a substantial expansion of its loss mitigation activities, personnel and initiatives.
3. Ramping up defaulted loan reviews to pursue recoveries from lenders, focusing especially on our Alt-A book. The objective is to expand loan reviews where the company incurred a loss or could incur a loss due to fraud or improper lending practices. To achieve this, we are increasing post-foreclosure loan reviews from 900 a month in January to 4,000 a month by the end of the year, expanding our quality-control reviews for targeted products and practices, and are on track to double our anti-fraud investigations this year. We expect this effort to increase our credit loss recoveries in 2008 and 2009.
4. Augmenting our foreclosed property strategy, including the opening of offices in Florida and California to closely manage the sales of our properties in these states. We have expanded our network of firms to assist in property disposition to ensure we have adequate capacity to sell the additional properties we expect. To date, under this approach we have been able to process the increased volume of foreclosed property sales without an increase in cycle times or excessive price concessions. Finally, we are evaluating various proposals we have received from third parties involving the sale of properties in bulk transactions.
“In addition, we are in discussions with the Federal Housing Finance Agency (FHFA) regarding the capital and safety and soundness framework envisioned in the recently-enacted Federal Housing Finance Regulatory Reform Act of 2008. The FHFA Director has indicated that the May 2008 agreement with OFHEO and the current OFHEO-directed capital requirement continue to apply. At the same time, we will continue to work closely with the FHFA, the Federal Reserve, the Department of Treasury, Congress and our partners in the industry so that we continue to provide a critical, reliable source of mortgage funding and liquidity in the years to come,” added Mudd.
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Fannie Mae Reports a Loss of $2.3 Billion in Second Quarter of 2008
By David M. Kinchen
Huntingtonnews.net Real Estate Writer
Washington, DC (HNN) – Fannie Mae (FNM/NYSE) on Friday, Aug. 8, 2008 reported a net loss of $2.3 billion, or ($2.54) per diluted share, in the second quarter of 2008, compared with a first quarter 2008 net loss of $2.2 billion, or ($2.57) per diluted share. Results were driven primarily by an increase in the provision for credit losses that more than offset higher revenue and fair value gains.
“Our second quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Daniel H. Mudd, president and chief executive officer. “Fannie Mae is providing stability and liquidity to the housing market in the United States, and we will continue to play a key role as the market recovers from this cycle. We have already undertaken a series of initiatives, including raising more than $7 billion in additional capital in the second quarter, to help us manage through the most difficult U.S. housing market in more than 70 years."
“Volatility and disruptions in the capital markets became even more pronounced in July. In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves," Mudd added. "Given this volatility and the build-up of our reserve, as well as the uncertainties inherent in the U.S. economy and the housing market, we are taking a series of additional actions that reflect our ongoing focus on conserving and enhancing our capital, as well as managing our credit risk through the balance of this cycle.”
Fannie Mae, formally known as Federal National Mortgage Association, is a government sponsored enterprise (GSE) of the U.S. It is a stockholder-owned corporation authorized to make loans and loan guarantees.
Fannie Mae is the leading market-maker in the U.S. secondary mortgage market, which helps to replenish the supply money for mortgages and enables money to be available for housing purchases. Fannie Mae and the Federal Home Loan Mortgage Corp. (Freddie Mac) own or guarantee about half of the U.S.'s $12 trillion mortgage market. As a result, the corporations were affected particularly hard by the housing meltdown in late 2007 and early 2008.
Mudd said Fannie Mae is taking the following actions:
Capital Conservation and Enhancement
1. Reducing the common stock dividend from $0.35 per share to $0.05 per share, effective for the third quarter, to preserve $1.9 billion in capital through 2009.
2. Reducing annual operating costs 10 percent by year end 2009 as the company drives the strategic priorities of credit risk management and revenue generation. Administrative expenses will have already been reduced approximately 35 percent, from $3.1 billion in 2006 to an estimated $2.0 billion in 2008.
3. Increasing our guaranty fees, including a 25 basis point increase in our adverse market delivery charge, as well as other risk-based pricing changes, announced this week.
4. Managing the balance sheet to ensure the most efficient use of capital. Providing market liquidity will be the priority for our portfolio activities, and purchases will be concentrated in high-spread assets to generate the maximum amount of revenue per dollar of risk capital. As a result, the company will balance profitable portfolio growth opportunities in the near term with prudent capital conservation through the current housing cycle.
Credit Risk Management
1. Improving underwriting guidelines to eliminate higher-risk loans. Over 60 percent of our losses have come from a small number of products, but especially Alt-A loans. Through our recent underwriting changes, the volume of these products has declined more than 80 percent from their peak levels. We have already made underwriting changes to mitigate risk characteristics that drove those losses. After considered analysis, we will eliminate newly originated Alt-A acquisitions by year end.
2. Increasing our workout ratio from approximately 50 percent in 2007 to 56 percent in the first half of the year. The company has set a workout ratio goal of 60 percent by year end, reflecting a substantial expansion of its loss mitigation activities, personnel and initiatives.
3. Ramping up defaulted loan reviews to pursue recoveries from lenders, focusing especially on our Alt-A book. The objective is to expand loan reviews where the company incurred a loss or could incur a loss due to fraud or improper lending practices. To achieve this, we are increasing post-foreclosure loan reviews from 900 a month in January to 4,000 a month by the end of the year, expanding our quality-control reviews for targeted products and practices, and are on track to double our anti-fraud investigations this year. We expect this effort to increase our credit loss recoveries in 2008 and 2009.
4. Augmenting our foreclosed property strategy, including the opening of offices in Florida and California to closely manage the sales of our properties in these states. We have expanded our network of firms to assist in property disposition to ensure we have adequate capacity to sell the additional properties we expect. To date, under this approach we have been able to process the increased volume of foreclosed property sales without an increase in cycle times or excessive price concessions. Finally, we are evaluating various proposals we have received from third parties involving the sale of properties in bulk transactions.
“In addition, we are in discussions with the Federal Housing Finance Agency (FHFA) regarding the capital and safety and soundness framework envisioned in the recently-enacted Federal Housing Finance Regulatory Reform Act of 2008. The FHFA Director has indicated that the May 2008 agreement with OFHEO and the current OFHEO-directed capital requirement continue to apply. At the same time, we will continue to work closely with the FHFA, the Federal Reserve, the Department of Treasury, Congress and our partners in the industry so that we continue to provide a critical, reliable source of mortgage funding and liquidity in the years to come,” added Mudd.
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