Fannie Mae Suffers Stinging Loss

[Dec 9, 2007.]

Lending giant Fannie Mae suffered a devastating loss during the third quarter of the year.

The nation's largest source for home loans reports that its loss more than doubled to $1.39 billion - a loss created by the housing crisis. Fannie Mae owns or guarantees some $2.7 trillion worth of mortgage assets. In its filing with the U.S. Securities and Exchange Commission, Fannie Mae stated that its derivative contracts had dropped in value by some $2.24 billion. In addition, it posted some $1.2 billion in credit losses.

Fannie Mae's chief executive has said he expects the housing market to worsen - a prediction that has been made by a number of economists. Fannie Mae expects home prices to decline 2% this year and 4% next year. Other mortgage giants posting huge losses included Citigroup, Countrywide, and Washington Mutual.

On the heels of the news, Fannie Mae's stock dropped 80 cents. The lender owns or guarantees about one in five home loans in the U.S. Regulators are concerned that Fannie Mae's mortgages might have been impacted by higher-than-realistic home appraisals. The Attorney General of New York has subpoenaed Fannie Mae in an effort to investigate possible collusion between mortgage entities and home appraisers.

Fannie Mae is a creation of Congress, which wanted to establish an organization that would work to increase home ownership. The organization makes money by holding mortgages and mortgage bonds as investments. It also assesses a fee to package loans as securities. Whenever defaults and foreclosures increase, its losses rise.
The company reported that net income for the initial 3 quarters of 2007 decreased nearly 60%. Company officials blame the decline on decreasing home prices and the national credit crunch.

The U.S. housing crisis shows no signs of abating anytime soon. As a result, some members of Congress are promoting a proposal designed to decrease the rate of foreclosures in the short term.

Julie Ann Amos
December 9th 2007

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