Nov. 10 (Bloomberg) — Fannie Mae posted a record quarterly loss as new Chief Executive Officer Herbert Allison slashed the value of the mortgage-finance provider’s assets by at least $21.4 billion and said it may need to tap federal funds next year.
In its first report since being seized by the U.S. government in September, Washington-based Fannie said its third- quarter net loss widened to $29 billion, or $13 a share, the largest for any U.S. company this year.
Allison, the former head of TIAA-CREF who was hired when the government took over Fannie and Freddie Mac, reduced most of Fannie’s deferred tax credits, increased default estimates and raised credit loss estimates. The decisions cut Fannie’s net worth by 79 percent and shows the new management is taking a dimmer view of the company’s financial future than the team under former CEO Daniel Mudd.
“The earnings were gruesome,” said Howard Shapiro, an analyst at Fox-Pitt Kelton Inc. in New York. “They’re trying to clean house.”
Allison, 65, and his new management increased reserves for future credit losses to $15.6 billion from $8.9 billion in the second quarter, took a $1.8 billion charge against “temporary” losses, and said holdings of nonperforming assets, which includes foreclosures, swelled by 37 percent to $71 billion, according to a filing today with the U.S. Securities and Exchange Commission.
The company’s net loss in the same period last year was $1.4 billion, or $1.56 a share. The fair value of assets fell to negative $46.4 billion, according to the filing.
Government Money
Fannie, which traded at almost $50 a share a year ago, rose 1 cent to 75 cents at 11:11 a.m. in New York Stock Exchange composite trading. Fannie’s stock market value slumped from $39 billion at the beginning of the year to about $4 billion as of Nov. 7, including the government’s 79 percent stake.
Fannie slashed its net worth, or the difference between assets and liabilities, to $9.4 billion on Sept. 30 from $44.1 billion at Dec. 31. The company said today it may fall to negative net worth by the end of next quarter, requiring it to seek government funding. Fannie said today that it hadn’t tapped any federal aid through Nov. 7.
The Federal Housing Finance Agency placed Fannie and Freddie under its control Sept. 6 and forced out management after examiners found their capital to be too low and of poor quality. Treasury Secretary Henry Paulson pledged to invest as much as $100 billion in each company as needed to keep their net worth positive.
The companies will need that money “sooner rather than later,” according to Paul Miller, an analyst at Friedman, Billings, Ramsey in Arlington, Virginia.
Debt Limits
Fannie said that it has “limited ability to issue debt securities with maturities greater than one year,” and that the greater reliance on short-term funding has exposed it more to the risk related to changes in interest rates. The cost of using derivatives to manage those risks has also increased, Fannie said.
Fannie’s financing agreement with the Treasury constrains its ability to issue debt, capping the total outstanding amount at 110 percent of the balance as of June 30. Fannie estimates that limit as $892 billion. As of Oct. 31, Fannie had $880 billion in total debt outstanding.
Fannie and Freddie, which own or guarantee about 40 percent of the U.S. mortgage market, must also cope with the possibility that the U.S. housing slump may extend well into a fourth year. Banks are still turning away borrowers, foreclosures are worsening the glut of unsold homes and job losses climb higher.
Lower property values will keep eroding home equity, causing consumers to retrench further. The S&P/Case-Shiller home-price index of values in 20 U.S. cities dropped 16.6 percent in August from a year earlier, the fastest pace on record. The index has been lower every month since January 2007.
`New Deal’
Fannie today maintained its housing market forecasts, reiterating that home prices nationally will decline 15 percent to 19 percent from their peak in 2006 before they stabilize.
Fannie was created in the 1930s under Franklin D. Roosevelt‘s “New Deal” plan to revive the U.S. economy. Freddie was started in 1970. The companies were designed to expand homeownership and provide market stability. They make money by financing mortgage-asset purchases with low-cost debt and on guarantees of home-loan securities they create out of loans from lenders.
Fannie’s tax credit, which totaled $20.6 billion as of June 30, had built up as losses deepened. Companies take the credits with the intent of using them to reduce tax bills when they become profitable again. The credits need to be written down if a company doesn’t see profits in the near future.
Sugarcoating
The use of deferred-tax assets and other accounting methods by Fannie and Freddie to inflate their capital reserves was cited by regulators as one of the reasons why the government took control of the firms. In the statement today, Fannie said it had $4.6 billion of tax credits remaining.
Allison spent 28 years at New York-based Merrill Lynch & Co., before later joining TIAA-CREF. While at Merrill, he played a key role in negotiations that led to the 1998 bailout of hedge fund Long Term Capital Management.
He is quoted in the 2005 book “What Goes Up, The Uncensored History of Modern Wall Street,” by Eric Weiner, as saying “the best idea was to take an approach that was deliberately crude.”
Fannie set aside $6.7 billion to cover delinquencies as home prices drop, up from $3.7 billion last quarter. The company also charged off $1.8 billion in securities losses it had previously categorized as temporary because executives had anticipated the assets would recover.
Credit-related expenses rose 74 percent to $9.2 billion from $5.3 billion last quarter, including the provisions for future losses.
“The new management team has no incentive to sugarcoat their earnings,” Miller at Friedman, Billings said.
To contact the reporter on this story: Dawn Kopecki in Washington at dkopecki@bloomberg.net
Source: http://www.bloomberg.com/apps/news?pid=20601087&sid=ausqyp34rOO4&refer=home
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