US Fannie Mae in the red after loss of $2.3 billion

America’s largest mortgage finance company, Fannie Mae, has revealed a net loss of $2.3 billion (£1.2 billion) for the second quarter, compared with a profit of $1.97 billion (£1.02 billion) last year.

The loss is a direct result of the problems in the US housing market and the sub-prime crisis, as borrowers defaulted on home loans.

The news comes just days after sister company, Freddie Mac, announced worse than expected results and the company’s chief warned that US house prices have further to fall.

Both companies, who are government sponsored, guarantee almost 50% of the country’s mortgage debt.

The companies purchase loans from high street lenders and package them for investors in the debt markets and are responsible for over $5 trillion of home loans.

According to Fannie Mae, the problems in the housing market has meant it has set aside $5.3 billion to cover credit losses over the second quarter.

Daniel Mudd, president and chief executive officer of Fannie Mae, said the results are a consequence of challenging conditions in the housing and mortgage markets that commenced in 2006 and have deepened through last year and this year.

Mr Mudd described the current difficulties in the housing market the most difficult for over 70 years.

The group has announced its intention to cease purchasing ‘Alt-A’ loans (loans available to borrowers with good credit but little proof of their earnings), or people who either put down a small deposit, or no deposit, for their loan.

In addition, it is to slash its operating costs by 10%, increasing its guaranty fees and cutting its dividend payout to shareholders by 85%.

According to economists, a collapse of either Fannie Mae or Freddie Mac could cause turmoil throughout the financial system by closing down a large portion of the mortgage industry.

Fannie Mae and Freddie Mac were both offered a financial lifeline last month from the federal government, to extend their line of credit but this financial help may leave the taxpayer with a bill of $25 billion over the next couple of years.

Discuss this in the Finance Markets forums

Story link: US Fannie Mae in the red after loss of $2.3 billion