Fannie Mae sinks deeper in US housing meltdown

Fannie Mae reported a net loss of 2.3 billion dollars in the second quarter that followed a first-quarter loss of 2.2 billion dollars.

The second-quarter loss of 2.54 dollars per share was more than triple the 69 cents forecast by most analysts.

Fannie Mae plans to slash its dividend, raise fees and end home loans known as Alt-A, considered riskier than prime loans but less risky than the subprime loans at the epicenter of the housing market crisis.

The company blamed the second-quarter losses mainly on a sharp hike in its provision for credit losses in the deepening housing slump.

The market has been in freefall since early 2006 after the collapse of a speculative housing boom fed by easy credit.

The embattled government-sponsored, shareholder-owned company and its twin Freddie Mac underpin 5.2 trillion dollars in home loans, nearly half the US housing market.

Freddie Mac reported Wednesday a second-quarter loss of 821 million dollars, also more than triple market expectations.

The federal government last week threw a financial lifeline to the two firms whose stocks have plummeted as investors worry about their solvency. Congress estimates it could cost US taxpayers 25 billion dollars.

“Our second-quarter results reflect challenging conditions in the housing and mortgage markets that began in 2006 and have deepened through 2007 and 2008,” said Daniel Mudd, Fannie Mae’s president and chief executive.

Mudd noted the company had already taken a number of steps, including raising more than seven billion dollars in additional capital, in the second quarter, “to help us manage through the most difficult US housing market in more than 70 years.”

Given the increased volatility in the capital markets and deteriorating credit conditions the company has experienced in July, he said, “we anticipate further increases in our combined loss reserves.”

The company plans to slash its third-quarter dividend from 35 cents to five cents, reduce annual operating costs by 10 percent by the end of 2009 and eliminate the acquisition of Alt-A loans by December 31.

Defaults are spiking on the popular Alt-A loans -- typically given to borrowers with clean credit who may have little or no money for a down payment or cannot fully prove their income source -- amid tighter credit and falling home values.

Fannie Mae said it continues to expect home prices to fall between 7.0 and 9.0 percent in 2008.

However, it noted the market trend was “moving toward the high end of those ranges.”

Shares in Fannie Mae tumbled 9.0 to close at 9.05 dollars in New York; Freddie Mac edged up 0.7 percent to 5.90.

Frederic Dickson, analyst at DA Davidson & Co., said the grim news from the financial sector this week was darkening hopes for an economic recovery anytime soon.

Losses from insurer AIG, Fannie Mae and Freddie Mac, as well as Citigroup and Merrill Lynch’s agreements to repurchase billions of dollars’ worth of tainted securities “raise the specter that we are not out of the woods yet despite some better-than-expected earnings results, although still down significantly from last year, in the second quarter,” he said.