WASHINGTON (AP) — The steeper slide in home prices is accelerating the pace of foreclosures, Fannie Mae said Tuesday as it outlined plans for shoring up its finances following a $2.2 billion first quarter loss.
While the nation's largest buyer of home loans will slice its dividend and attempt to raise $6 billion, mostly by issuing new shares, federal regulators loosened Fannie's capital requirements as the government looks for ways to bolster the housing market.
Moody's Investors Service downgraded the company's financial strength rating because of the potential for further losses from soured home loans over the next two years, but investors pushed Fannie's shares higher, in anticipation of the bigger role Fannie will play in the mortgage market.
Fannie's president and CEO, Daniel Mudd, said during a conference call with analysts that "right now we are in the belly of the cycle," meaning losses from defaulted mortgages are likely to worsen next year.
Mudd said home prices in the January-March period fell "faster than anyone anticipated," and the company now foresees a nationwide drop of 7 percent to 9 percent in 2008. Previously, Fannie had been looking this year for a drop of 5 percent to 7 percent.
As a result, Fannie said it expects to lose money this year on 13 to 17 of every 1,000 mortgages held on its $3 trillion book, up from its earlier expectation of 11 to 15 and a steep increase from four to six in 2007.
Despite the gloomy outlook, Fannie's federal regulator, the Office of Federal Housing Enterprise Oversight said it will reduce the capital cushion the company has to maintain. After it raises an anticipated $6 billion in a stock sale, Fannie will be required to keep surplus capital of 15 percent of their total mortgage debt, down from the current 20 percent. Another five-point cut will come in September, provided there is "no material adverse change" in the company's regulatory compliance.
Fannie's capital was at $42.7 billion as of March 31, down from $45.4 billion at year-end 2007.
The agency's director, James B. Lockhart, said capital requirements were eased because Fannie has improved internal financial controls following a multibillion-dollar accounting scandal in 2004.
Housing slump news came apace Tuesday, as the country's biggest homebuilder, Dallas-based D.R. Horton Inc., reported that hefty charges and property writedowns swung it to a second-quarter loss of $1.31 billion, or $4.14 a share, from a year-earlier profit of $51.7 million, or 16 cents a share.
The government has come to rely increasingly on Fannie and Freddie Mac, its smaller government-chartered sibling, as other lenders have shied away from the risk-heavy market for mortgage securities. In the first quarter, Fannie's estimated market share of the new securities backed by home mortgages that are issued increased to 50 percent.
Some critics have said that allowing the companies to take on more debt could threaten the global financial system.
The Bush administration has been pushing for tightened government reins over Fannie and Freddie, and legislation doing that has become a key bargaining chip for congressional Democrats seeking Republican support for a $300 billion housing rescue plan.
Following an initial steep decline, Fannie shares jumped 5 percent, or $1.46, to $29.75 in afternoon trading. They are at roughly half their value of a year ago.
The company's estimated fair value of net assets as of March 31 was $12.2 billion, down 66 percent from $35.8 billion at the end of December. The huge decline was attributed to falling home prices and changes made to reflect new accounting methods. The assets are not counted toward the overall loss.
Fannie's first-quarter loss contrasts with a profit of $961 million in the January-March period last year. The company reported Tuesday that the early 2008 loss was equivalent to $2.57 a share, far steeper than the 81 cents per share that analysts polled by Thomson Financial had expected it to lose. Fannie earned 85 cents a share a year earlier.
Reflecting the ravages of the housing crisis, Washington-based Fannie was forced to set aside $3.2 billion to account for bad loans. The losses were greatest in the hardest-hit states: California, Florida, Michigan and Ohio.
Revenue rose 38 percent in the first quarter, to $3.8 billion, bolstered by increases in fees that Fannie charges lenders to guarantee mortgages and in interest income.
On Tuesday, Fannie said it would cut its dividend, starting in the third quarter, from 35 cents to 25 cents a share, freeing up around $390 million a year.
The company already had slashed the dividend 30 percent in December, when it also raised $7 billion in capital in a special stock sale.