Fannie Mae Has $3.55 Billion Fourth-Quarter Loss (Update2)

By James Tyson

Feb. 27 (Bloomberg) -- Fannie Mae, the largest source of money for U.S. home loans, posted a $3.55 billion fourth-quarter loss and said its slump will worsen this year as rising foreclosures send credit costs soaring.

The net loss was triple analyst estimates. Fannie Mae recorded a $3.2 billion drop in the value of derivative contracts and $2.9 billion in credit expenses, according to a filing with the Securities and Exchange Commission.

``We are working through the toughest housing and mortgage markets in a generation,'' Fannie Mae Chief Executive Officer Daniel Mudd said in an accompanying statement.

Fannie Mae increased its estimates for credit losses and said home prices will decline more than its previous forecast, boosting costs for the $2.3 trillion of mortgages that the government-chartered company owns or guarantees. The prediction by Fannie Mae, which accounts for at least one in five home loans, heightened concerns that the housing market may drive the U.S. economy into recession and sent stocks lower.

``I expect it's only the beginning,'' said Joshua Rosner, the managing director of New York-based research firm Graham Fisher & Co.

Fannie Mae today raised its estimates for credit losses this year to a range of 11 basis points to 15 basis points from a range of 8 basis points to 10 basis points. Analysts including Paul Miller at Friedman Billings Ramsey & Co. in Arlington, Virginia, say credit losses will rise to a range of 15 basis points to 25 basis points this year and in 2009.

Loan Losses

The company has lost more than half its market value in the past year as the housing slump deepened. Analysts at Goldman Sachs Group Inc. and Merrill Lynch & Co. cut their recommendations to ``sell'' in the past week on concern that falling home prices will restrict earnings.

Fannie Mae fell 34 cents, or 1.2 percent, to $26.63 as of 9:40 a.m. in New York Stock Exchange composite trading. Freddie Mac, which ranks second to Fannie Mae, dropped 72 cents to $24.49 and is down more than 61 percent in the past year.

Fannie Mae's net loss amounted to $3.80 share, compared with profit of $604 million, or 49 cents, a year earlier, Fannie Mae said. Excluding some items, the per-share loss was $3.79, compared with the $1.20 average estimate of 12 analysts in a Bloomberg survey.

Foreclosures Rise

Fannie Mae and Freddie Mac profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Freddie Mac is scheduled to report tomorrow. The McLean, Virginia-based company had losses of $2.02 billion in the third- quarter and $480 million in the year-earlier fourth quarter.

Bank seizures of U.S. homes almost rose 90 percent to 45,327 last month from the same period a year ago, according to RealtyTrac Inc., a seller of foreclosure statistics that has a database of more than 1 million properties. Total foreclosure filings, which include default and auction notices as well as bank seizures, increased 57 percent. More than 233,000 properties were in some stage of default last month, RealtyTrac said in a statement.

Timely Earnings

Fannie Mae, by reporting timely audited financial results for the first time since 2004, met conditions for the removal of a federal limit on its $724 billion in mortgage investments imposed after a $6.3 billion overstatement of earnings. Its portfolio of home loans and mortgage-backed securities is one of its two main sources of profit.

Still, the need to bolster capital against the worsening housing market will inhibit growth this year, Miller said. Fannie Mae sold its preferred shares in December after its third-quarter loss of $1.4 billion.

``For me to get very comfortable in recommending this stock, I'd like to see something above $15 billion in capital raising,'' Miller said.

The cost of protecting Fannie Mae bonds from default have doubled this year. Credit-default swaps tied to the bonds rose 8 basis points to 87 basis points today, according to broker Phoenix Partners Group in New York.

A basis point on a credit-default swap contract protecting $10 million of debt for five years is equivalent to $1,000 a year. Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Fannie Mae and other companies use derivatives to hedge against losses on assets and investments including home loans and mortgage bonds.

To contact the reporter on this story: James Tyson in Washington at at