Fannie Mae, the largest US mortgage- finance company, sliced its dividend after posting a fourth straight quarterly loss and said the worst housing slump since the Great Depression is deepening.
Fannie slumped 12 per cent in early New York Stock Exchange trading after reporting a second-quarter loss of $2.51 a share, compared with the 72-cent average estimate of 10 analysts in a Bloomberg survey. The common-stock dividend will be cut to 5 cents from 25 cents a share, Washington-based Fannie said today.
Fannie’s results come two days after Freddie surprised investors with a loss that was three times wider than analysts anticipated. Fannie’s credit-related expenses rose 66 per cent to $5.3 billion and Chief Executive Officer Daniel Mudd said the company anticipates a “significant” increase in credit loss reserves through 2008.
“Neither of these companies have properly provisioned for what we’re heading into,” said Paul Miller, an analyst at Friedman, Billings, Ramsey & Co in Arlington, Virginia, who has an “underperform” rating on both companies. “This thing is going to get worse and last longer and deeper than they originally thought.”
Fannie and Freddie plunged more than 80 per cent in New York trading this year on concern they may not have enough capital to withstand record foreclosures on the $5.2 trillion of mortgages they own and guarantee. Freddie’s loss increased speculation that US Treasury Secretary Henry Paulson may use his new powers to pump capital into one or both companies.
Both companies will need to raise as much as $15 billion, Miller said.
Net Loss
Fannie’s net loss was $2.3 billion, or $2.54 a share, compared with net income of $1.95 billion, or $1.88 a share, in the same quarter a year ago.
Mudd, 49, has raised $14.4 billion since late last year, though still failed to quell concerns that the company is short of capital. As worries escalated, he dispatched executives to Asia to calm investors.
“Volatility and disruptions in the capital markets became even more pronounced in July,” Mudd said in the statement. “In addition, credit performance has continued to deteriorate and, based on our experience in July, we anticipate further increases in our combined loss reserves.”
Fannie, down 27 per cent since Freddie’s earnings release on Aug 6, declined $1.20 to $8.75 at 8 am in New York Stock Exchange composite trading. McLean, Virginia-based Freddie fell 27 per cent in two days and declined 60 cents to $5.89 yesterday.
‘Propitious Time’
Freddie CEO Richard Syron, 64, this week said the company is waiting for a more “propitious time” to sell the $5.5 billion in stock it had agreed to offer in May. Freddie said it will cut its dividend at least 80 per cent and may slow purchases of mortgages to shore up capital.
Fannie halved its dividend in two cuts since December, reducing it to 25 cents from 50 cents.
“The one advantage that Fannie has it that it did raise capital when the window was open to them,” Joshua Rosner, an analyst at Graham Fisher & Co in New York, said in an interview with Bloomberg Television.
Fannie and Freddie, government-chartered enterprises created to boost mortgage financing, own or guarantee 42 per cent of the $12 trillion of US home loans outstanding. They make money by holding mortgage assets that yield more than their debt costs, and by guaranteeing bonds they create out of loans.
‘Marginally Profitable’
“Fannie Mae will be marginally profitable in the back half of this year and in 2009,” said Credit Suisse Group’s Moshe Orenbuch, the top-ranked analyst covering the company. Orenbuch, based in New York, has an “underperform” rating on Fannie and Freddie.
The companies are stumbling just as the government is leaning on them to revive the housing market and keep the economy out of recession.
Paulson last month received authority for his plan to buy unlimited equity stakes in the companies and extend them financing if needed to help bolster confidence in the companies.
Bill Gross, manager of the world’s biggest bond fund and Pacific Investment Management Co, said the Treasury will probably be forced to buy as much as $30 billion of preferred shares in both Fannie Mae and Freddie Mac.
Housing Slump
Almost one in every 10 mortgages in the US was in trouble during the first quarter, the highest in records dating to 1979, according to the Mortgage Bankers Association in Washington. Delinquencies, or home loans with payments 30 days or more overdue, rose to 6.35 per cent of outstanding mortgages and the share of homes in foreclosure rose to 2.47 per cent.
Freddie revised its forecast for housing price declines to a drop of as much as 20 per cent from a previous estimate of 15 per cent and said the number of properties it has in foreclosure rose to 22,000, the most since it was created in 1970 during the Vietnam War.
Freddie has about $25 billion and Fannie has about half that in potential losses from those securities that the companies say are “temporary” because they assume they will recoup the investment once it matures, Orenbuch estimates. Many of those losses may never be recovered, he said.
