Fannie, the largest buyer and backer of US home loans, said yesterday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Today, Freddie is expected to report a $1.5 billion fourth-quarter loss, according to Wall Street estimates.
Under a previous agreement with federal regulators, the timely filing of Fannie's and Freddie's financial results triggers the removal of an investment-portfolio cap placed in the aftermath of multibillion-dollar accounting scandals at the government-sponsored companies.
Analysts said the impact will be limited, however, because of the large cash cushion Fannie and number two mortgage financer Freddie must maintain as a reserve against risk. Tightness in credit markets makes it expensive for Fannie and Freddie to marshal additional funds.
Fannie said close to 90 percent of its fourth-quarter losses stemmed from investments it made based on the assumption falling interest rates would cause mortgage values to appreciate.
Shares of Washington-based Fannie swung widely after the report was released. Shares of Fannie climbed 30 cents, or 1.1 percent, to close at $27.27. Shares of Freddie fell 12 cents to $25.09.
Fannie's $3.56 billion quarterly loss contrasts with a profit of $604 million in the same period a year earlier.
"The housing conditions are serious and they've gotten worse," the company's president and chief executive, Daniel Mudd, said in a conference call with analysts.
A silver lining for Fannie, executives said, will be the anticipated wave of refinancing activity as borrowers with adjustable loans resetting at higher rates secure more affordable, fixed-rate mortgages. Plans put in place by the Bush administration and Congress are intended to prime the mortgage-market pump, though the effects so far have been limited.
An extra spark to the mortgage market could come following yesterday's announcement by the Office of Federal Housing Enterprise Oversight, which said that on March 1 it will remove the combined $1.5 trillion cap on Fannie's and Freddie's mortgage holdings.
However, a bigger constraint on the companies' ability to buy mortgages has been a government mandate that requires them to keep 30 percent more capital in reserve than the minimum legal requirement, analysts said. That restriction, which the government is considering decreasing, means Fannie and Freddie would have to boost their reserves by billions to make more loan purchases.
Because of the required 30 percent cushion, the companies have been forced to sell special stock to raise a total $13 billion in capital in 2007 and have cut dividends.
The government "clearly is responding to pressure to open up Fannie and Freddie's ability to buy loans," said Bob Walters, chief economist with Quicken Loans, a Michigan-based lender.