On Monday, besieged mortgage giant Fannie Mae (FNM)
reported a third quarter loss of $29.0 billion, or $13.00/share, compared with a loss of $2.3 billion, or $2.54/share, in the year-ago period -- a loss that would seemingly move the GSE ever-closer to drawing on the $100 billion in taxpayer dollars committed to the firm by the U.S. Treasury
As Fannie had warned a few weeks earlier, it took a mammoth $21.4 billion non-cash charge to establish a valuation allowance against deferred tax assets, as well absorbing $9.2 billion in credit-related expenses tied to ongoing woes in the U.S. mortgage and housing markets. It also said in a filing with the Securities and Exchange Commission
that "if current trends in the housing and financial markets continue or worsen," the company may have negative net worth by the end of the year.
Net worth during the quarter fell from $41.4 billion at the end of June to $9.4 billion during Q3, Fannie said. Should the GSE see net worth go negative by the end of this year, it would be required to obtain funding from the Treasury "in order to avoid a mandatory trigger of receivership under current statute," the company said.
Irrespective of rationale (which, it should be noted, has been a subject of heated debate in close circles in recent weeks) Fannie's decision to charge-off tax credits it had been carrying on its books suggests that the GSE no longer believes it will earn enough in the future to allow it to use the credits. While the company did not estimate its loss sans the write-off of its tax assets, it's clear that mounting credit costs were worse than expected as well, meaning results would have been pretty bad regardless.
The $9.2 billion in credit costs -- up from $5.3 billion one quarter earlier -- came as the GSE set aside an additional $6.7 billion to cover estimated losses in Fannie's current book of business, it said; the substantial contribution to loss reserves pushed Fannie's combined loss reserves to $15.6 billion at the end of the quarter, up substantially from $8.9 billion at the end of Q2.
Fair-value and investment losses contributed another $5.5 billion in net losses, Fannie said, as the GSE lost $1.8 billion on other-than-temporary impairments to private-label Alt-A and subprime RMBS held in portfolio; widening credit spreads during Q3 also drove a $2.9 billion securities trading losses, as well.
Collateral performance continues to drive reserving activity
Not surprisingly, borrower defaults continued to rise during the quarter; Fannie said that non-performing loans reached $63.6 billion, or 2.2 percent of the total guaranty book of business, compared to $46.1 billion one quarter earlier. For those keeping score at home, that's a 38 percent rise in NPLs within just one quarter. Beyond non-performing mortgages, Fannie said its REO inventory continued to swell during the quarter -- reaching 67,519 at the end of Sept., up from 54,173 at the end of June.
Alt-A continues to be problematic, a topic we covered in-depth in a recent HousingWire Magazine
(see "Fannie, Freddie's Pain in the Alt-A," Sept/Oct 2008). Alt-A mortgages represent 11.1 percent of Fannie's single-family conventional mortgage credit book of business, or $298.9 billion in unpaid principal balance at the end of the third quarter -- yet Alt-A loans drove 47.6 percent of third-quarter credit losses.
Home price declines are proving to be the undoing of much of the Alt-A loan book, given the preponderance of stated-income loans that saw borrowers lie about their income levels or employment during the housing boom. Just 5.4 percent of the Alt-A loan book at Freddie had an LTV above 90 percent at origination; the GSE now estimates that nearly 19 percent of Alt-A borrowers are underwater, relative to the loans it owns or insures.
And that pricing pressure isn't expected to ease up anytime soon. Fannie's executives said Monday they now expect 2008 home price declines to average close to 9 percent for the year, with peak-to-trough declines reaching up to roughly 19 percent.
If that's the case, the problems aren't likely to stay limited to just Alt-A borrowers -- Fannie estimated that a full 9.1 percent of its entire book
represents mortgages that were underwater at the end of Q3, Alt-A or not. The negative equity problem is particularly acute for $552.1 billion in 2007 vintage mortgages -- where more than 20 percent of the vintage is now estimated to be underwater, Fannie said.
In other words, it's not at all surprising to see the GSE bump up loss reserves. It appears those losses are well on their way towards materializing.
Read Fannie's full earnings release here
; the earnings supplement is available here
Paul Jackson at email@example.com
Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.