Fannie Posts Wide Loss, Will Raise Capital; Alt-A Mortgages Proving Problematic

Fannie Mae (FNM: 0.59 0.00%) said Tuesday morning that it lost $2.2 billion, or $2.57 per share, during a first quarter that saw credit quality continue to deteriorate at the GSE; the loss compares to a $3.6 billion loss posted one quarter earlier. Significant widening of credit spreads, and higher-than-expected home price declines and loan loss severity led to the losses, Fannie said in a press statement.

The GSE also said it will seek $6 billion in fresh capital, with $4 billion in an immediate offering of common stock, and another $2 billion in preferred stock to be issued at a later date. It also cut its dividend to 25 cents from a previous thirty cents, after cutting from 50 cents earlier this year.

Credit and derivative losses rose to $7.6 billion during Q1, up from $6.4 billion one year earlier, offsetting a $700 million jump in quarterly revenue to $3.8 billion.

“During the first quarter we saw heightened volatility in the secondary mortgage market, credit spreads that widened out to 22-year highs, and home prices that fell faster than expected,” Fannie CEO Daniel Mudd.

Once $6 billion in additional capital has been raised, Fannie will see restrictions on its capital levels loosened further from 20 percent to 15 percent above statutory minimums, the Office of Federal Housing Enterprise Oversight said in a separate statement Monday. The GSE regulator may further reduce its requirement to 10 percent in September, Fannie said, should it continue to remain above the capital surplus requirement; OFHEO first loosened its capital surplus charge in the middle of March from an originally-imposed 30 percent level.

A look at credit quality
Fannie Mae said that credit losses ballooned to 12.6 basis points relative to its average guaranty book of business in Q1, up from Q4’s reported 8.1 basis points. Driving a totla of $3.2 billion in total credit losses for the quarter was $2.3 billion in provisioning for expected losses on loans guaranteed by the mortgage giant.

Michigan and California alone accounted for 38.2 percent of credit losses during the quarter, underscoring that some of the nation’s most troubled housing markets are perhaps more deeply troubled than many press pundits currently think. And Alt-A loans — so-called “liar’s loans” that offered mortgage credit with little or no borrower documentation or lender verification — drove 42.7 percent of Fannie’s first quarter credit costs, it said.

The quickening pace of losses led the GSE to yet again up its estimates of the severity of the housing price downturn and its resultant effect of credit losses. Fannie Mae said Tuesday that it now expects its credit loss ratio for 2008 to range from 13 to 17 basis points, and that home prices will fall 7 to 9 percent during the year. At the end of February, the GSE had said it expected to see losses range from 11 to 15 basis points and that it expected prices to fall 5 to 7 percent.

Fannie said that the single-family serious delinquency rate — borrowers more than 90+ days in arrears — reached above the one percent threshold by the end of Q1, hitting 1.15 percent of the company’s portfolio. Serious DQs represented 0.62 percent in the year ago period, and were 0.98 percent one quarter earlier.

Charge-offs jumped significantly, as well, with Fannie reporting that it had charged off $630 million, or 9 basis points, during the first quarter; that compares to charge-off activity totaling $779 million in all of last year.

Analysts that spoke with HW are perhaps the most concerned about Fannie Mae’s exposure to Alt-A mortgages. The GSE held $310.5 billion (UPB) in Alt-A mortgages at the end of the first quarter, and $170.2 billion of that amount is within the 2006 and 2007 vintages.

Fannie also holds $30.6 billion in private-label Alt-A securities and $30.4 billion private-label subprime RMBS; while all of the GSE’s Alt-A holdings are currently rated AAA, it said that 15 percent of its holdings were on negative ratings watch by the end of the quarter. $6.4 billion of its subprime private-label securities were on negative ratings watch at the end of Q1, as well, the GSE said.

Fannie Mae also listed $56.1 billion in so-called Level 3 assets, an accounting category signifying assets that are deemed extremely illiquid, and for which no observable input exist to determine market price. This is the first quarter Fannie Mae has been required to disclose such assets under new accounting regulations FAS 157 and FAS 159.

For more information, visit http://www.fanniemae.com.

Disclosure: The author held no positions FNM when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.