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Fannie Mae plunges into red, seeks more cash

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Date: Tuesday 06 May 2008

LONDON (ShareCast) - Federal National Mortgage Association, colloquially known as Fannie Mae, is to raise another $6bn in capital and slash its dividend after huge write-downs plunged it into the red in the first quarter.

The largest buyer of US home loans reported a first quarter net loss of $2.19bn, down from a net profit of $961m a year earlier, as it took a $4.4bn hit on losses on derivatives and trading securities plus a $3.2bn charge for credit-related expenses.

The company said the fair value of its net assets plummeted $23.6bn in the first three months of 2008 to $12.2bn. House prices are falling faster than expected, the company said, and are now expected to decline by 7% to 9% over the course of the year.

Revenue rose 38% to $3.78bn as the company’s share of the market for new single-family mortgage related securities rose above 50%.

The losses, equivalent to $2.57 a share, were much higher than analysts had been anticipating; market expectations were for a loss per share of between 64 and 81 cents.

From the third quarter of this year Fannie Mae’s dividend will be cut to 25 cents from 35 cents as the company seeks to conserve funds.

The company intends to raise $6bn in new capital, starting with a $4bn sale of common and convertible preferred shares today (Tuesday).

The release of the results coincides with a decision by the Office of Federal Housing Enterprise Oversight to reduce the surplus capital Fannie May is obliged to hold by 5 percentage points to 15%; another 5 point cut is due to come into effect in September of this year provided there is no material adverse change in the company’s regulatory compliance.

The relaxation of the surplus capital requirement rules will free up more money to enable Fannie Mae to offer refinancing to struggling borrowers.