Fannie to Draw $15.2 Billion From Treasury After Loss

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Feb. 26 (Bloomberg) -- Fannie Mae, the mortgage-finance company seized by regulators in September, asked the U.S. Treasury for $15.2 billion in capital and raised the possibility of requesting more aid after a sixth consecutive quarterly loss drove its net worth below zero.

A wider fourth-quarter net loss of $25.2 billion, or $4.47 a share, pushed the company to make its first draw from a $200 billion federal lifeline, Washington-based Fannie said in a filing today with the Securities and Exchange Commission. Credit quality deteriorated and debt costs soared, forcing the company to record higher expenses and write down the value of its assets.

“We expect the market conditions that contributed to our net loss for each quarter of 2008 to continue and possibly worsen in 2009, which is likely to cause further reductions in our net worth,” Fannie said in a statement accompanying the filing.

Fannie and smaller competitor Freddie Mac, which own or guarantee almost half of the nation’s residential mortgage debt, have become integral components of President Barack Obama’s plan to help as many as nine million Americans avoid foreclosure. Last week the Treasury doubled its emergency capital commitment for each company from $100 billion as the government leans on Fannie and Freddie to modify or refinance more delinquent loans.

“These things aren’t being run for profitability; they are being run as a public policy tool,” Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, said in an interview prior to the earnings release.

More Losses to Come

McLean, Virginia-based Freddie in November tapped $13.8 billion in aid -- which the Treasury makes through preferred stock purchases -- after a record $25.3 billion third-quarter loss. Freddie has said it may seek as much as $35 billion more when it reports fourth-quarter results.

Fannie said its net worth, or the difference between assets and liabilities, fell to negative $15.2 billion on Dec. 31, from $9.4 billion on Sept. 30, according to the statement.

The company increased reserves for future credit losses to $24.8 billion last quarter from $15.6 billion in the most recent third quarter. Fannie has posted net losses totaling more than $63 billion since the third quarter of 2007, while Freddie has reported about $29.9 billion.

“These guys are going to lose money for quarters to come,” said Miller, one of only three analysts actively following Fannie and Freddie. “I don’t think anybody can even attempt to model in the degree of losses.”

Penny Stock

The government-run conservatorships won’t end until the mortgage market recovers and the companies regain profitability, Federal Housing Finance Agency Director James Lockhart said in a Feb. 19 Bloomberg Television interview.

Fannie and Freddie are the largest U.S. mortgage-finance companies, owning or guaranteeing about $5.3 trillion of the $12 trillion home-loan market.

The amount of nonperforming loans that Fannie guarantees for other investors doubled to $98.5 billion at the end of the fourth quarter from $49.3 billion in the third quarter, according to the filing. The nonperforming loans that Fannie owns jumped 45 percent to $20.5 billion from $14.1 billion in the third quarter.

FHFA put the companies under its control Sept. 6 and forced out management after examiners said the two may be at risk of failing amid the worst housing slump since the Great Depression. The Treasury at the time pledged as much as $100 billion for each company as needed when the value of their assets drops below the amount they owe on obligations.

Fair Value

Fannie and Freddie shares, which were above $30 in March, have been trading at less than $1 since December. Both stocks closed today at 49 cents in New York Stock Exchange composite trading.

Fannie was created in the 1930s under President Franklin D. Roosevelt’s “New Deal” plan to revive the economy. Freddie was started in 1970. The companies were designed primarily to lower the cost of home ownership by buying mortgages from lenders, freeing up cash at banks to make more loans. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.

The fair value of Fannie’s assets fell to negative $105.2 billion in the fourth quarter from $35.8 billion a year ago.

Debt Market Access

The company also said its access to the debt markets is still challenging.

“Although our access to the debt markets has improved noticeably since late November 2008, we expect continued pressure on our access to the debt markets throughout 2009 at economically attractive rates,” Fannie said in the filing. “Further, we expect the pressure will become increasingly great as we approach the expiration of the Treasury credit facility at the end of 2009.”

The difference between yields on Fannie’s two-year debt outstanding and two-year Treasuries rose to a record 1.82 percentage points on Nov. 20, from 1.02 percentage point on Sept. 30, before falling to 0.24 percentage point today, according to data compiled by Bloomberg. The company today sold $15 billion of debt in a record sale.

To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net.

Last Updated: February 26, 2009 19:35 EST