Fannie Mae losses spike

Fannie Mae reported earnings this morning where losses exceeded street estimates by a wide margin.

The first-quarter net loss was $2.57 a share, Fannie Mae said in a statement today. Analysts were anticipating a loss of 64 cents, the average of 12 estimates from a Bloomberg survey.

Based on comments from several analysts many predict losses will actually increase going forward as home price decline estimates were raised for the second time in 4 months today.

Fannie Mae told analysts to expect bigger credit losses in 2009 and said it sees U.S. home prices falling 7 percent to 9 percent this year, up from its previous estimate of 5 percent to 7 percent. Executives see U.S. home prices eventually tumbling by an average of as much as 19 percent before starting to recover.

“There are certain things that we can’t control, like home prices and the overall condition of the economy, and until they improve, they will be a drag on our old book,” Chief Business Operator Rob Levin told analysts during a conference call today. `

`They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007,” said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. “Things in the housing and credit markets are deteriorating very fast.”

Of course none of this matters to OFHEO, the regulatory body for the government sponsored entities, as they lowered capital requirements from 20% to 15% today, assuming Fannie can raise another $6 billion in fresh capital.

Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit.

Wouldn’t it be prudent to raise capital requirements for the GSEs since balance sheets are actually becoming more precarious?

Fannie Mae boosted estimates for credit losses this year to a range of 13 basis points to 17 basis points, up from a range of 11 basis points to 15 basis points. Every basis point, or 0.01 percentage point, is equivalent to 15 cents of earnings a share, according to Morgan Stanley analysts.

The fair value of assets dropped to $12.2 billion last quarter from $35.8 billion in December. Shareholder equity, which measures how much money would be left to stockholders after Fannie Mae pays all its bills, dropped to less than zero for common stockholders for the first time in at least 15 years, from $20.5 billion in the fourth quarter.

Fannie Mae listed $56.1 billion in so-called Level 3 assets, a category which indicates the holdings are so illiquid that they can only be priced using the firm’s own valuation models.

My Comments: So the playbook is now readily apparent for the mortgage fiasco conclusion: Fannie, Freddie and the FHLB will continue to soak up most of the $12 trillion mortgage market while shareholders will be left holding the bag. Another successful mission for the interventionists.

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