Fannie Needs More Money But Losses Shrink


Fannie Mae posted yet another multi-billion dollar
loss during the second quarter of 2011 according to papers filed with the
Securities and Exchange Commission on Friday. 
While the net loss for the quarter was $2.9 billion, the picture
improved significantly over the first quarter when the loss totaled $6.5
billion.  In the second quarter of 2010
the company lost $1.2 billion.  Fannie
Mae has requested an additional draw of $5.1 billion (the post-Q1 drawdown was
$8.5 billion and one year ago it was $1.5 billion) which will bring Treasury’s
total investment in the government sponsored enterprise to 104.8 billion since
it was placed in conservatorship in August 2008.

The company attributed the quarterly loss to $6.1
billion in credit-related expenses, the majority of which were due to loans
originated and acquired pre-2009.  In the
first quarter credit-related expenses totaled $11.0 billion and one year ago
the expenses were $4.85 billion.  Fannie
Mae said the much higher number in Q1 was driven by a deterioration of home
prices which abated in Q2. 

In a press release accompanying the second quarter
results the company said the loss “reflects the continued weakness in the housing
and mortgage markets, which remain under pressure from high levels of
unemployment, underemployment, and the prolonged decline in home prices.”  The corporate policy of pursuing loan
modifications also contributed to the loss. 
Fannie Mae expects its credit-related expenses to remain elevated
through the rest of the year due to the aforementioned factors.

At the same time it is requesting an additional
draw, Fannie Mae is paying a dividend to the Treasury of $2.3 billion on the
senior preferred stock it holds.  This
brings the total dividend payments to Treasury to $14.7 billion since the
conservatorship began. 

The company received $4.97 billion in interest
income during the quarter, virtually identical to that received in Quarter One
and $765 million more than the second quarter of 2010.  Net revenue was $5.24 billion compared to
$5.2 billion and $4.5 billion in the two earlier periods.  

Fannie Mae’s Single-Family guaranty book of business
was 2.88 trillion as of June 30, 2011, down from 2.90 trillion at the end of the
first quarter.  Income from this book was
$1.9 billion in both quarters resulting in a loss of $5.0 billion in the second
quarter compared to a $10.7 billion loss in the first.  The losses, again, were due to credit related
expenses attributable to loans purchased from 2005 through 2008.  At the end of the quarter 47 percent of
Fannie Mae’s Single-Family Book of Business consisted of loans purchased or
guaranteed since January 2009. 
Conventional loans originated during that period have a weighted average
loan-to-value ratio at origination of 68 percent and a credit score of 761.  The 2005-2008 acquisitions are becoming a
smaller percentage of the company’s guaranty book of business.  That vintage of loans accounted for 39 percent
of the book at the end of December and is now 34 percent.

The single-family serious delinquency rate has
decreased every month since February 2010, due in large part to home retention
solutions, foreclosure alternatives, and completed foreclosures.  Acquisition of loans with stronger credit
profiles as outlined above have also resulted in fewer loans becoming
delinquent.  The company expects the rate
to be affected into the future by home price changes, other macroeconomic
conditions, the length of the foreclosure process, and the continued success of
modification programs.

The multi-family guaranty book was valued at $191.5
billion in Q2 compared to $190.6 billion in Q1. 
Single-family credit-related expenses in the second quarter were almost
double that of the first quarter, $126 million compared to $65 million
resulting in a drop in earnings from $247 million to $87 million.

Markets’ net interest income was $3.9 billion in the second quarter of
2011, compared with $3.7 billion for the first quarter of 2011. Fair value
losses were $1.5 billion, compared with fair value gains of $218 million in the
first quarter of 2011. The net mortgage investment portfolio balance decreased
to $731.8 billion as of June 30, 2011, compared with $757.6 billion as of March
31, 2011, resulting from purchases of $32.8 billion, liquidations of $37.0
billion, and sales of $21.6 billion during the quarter. Capital Markets earned
$2.8 billion in the second quarter of 2011, compared with $4.3 billion in the
first quarter of 2011.

During the quarter
Fannie Mae took 54,697 homes into its owned property (REO) inventory, virtually
the same number as a quarter earlier, and disposed of 71,202 properties
compared to 62,814 in Q1.  The company
holds 135,719 properties in REO, a decrease of 17,500 since the end of
March.  The foreclosure rate was 1.20
percent in the second quarter, a fractional increase over the first quarter and
down from 1.52 percent one year ago.  This
change is partially due to the lengthening time required for foreclosures which
Fannie Mae attributes to the changing foreclosure environment in some
states.  This changing time-frame will,
Fannie Mae said, will continue to negatively impact timelines, foreclosure
rates, and credit related expenses and will delay the recovery of the housing

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