Fannie Mae's worse-than-expected first-quarter loss, reported on May 6, shouldn't come as a surprise to anyone who has followed the news of continuing declines in home prices across the U.S.
Still, the mortgage giant was able to offer some glimmers of hope to Wall Street: While its credit quality is expected to keep falling into next year, revenues are up and its liquidity position is improving with the help of loosening regulatory requirements and an effort to raise $6 billion in capital.
Shares Gained
Fannie Mae (FNM) reported a net loss of $2.2 billion, or $2.57 per share, for the first three months of 2008, vs. a profit of $961 million, or 85¢ per share, a year ago, on a 38.2% rise in revenue, to $3.78 billion.
The higher revenue came from a $131 million increase in guaranty income and a $554 million hike in net interest income, reflecting growth in the guaranty business, higher guaranty fees, and the lower cost of debt.
The rise in revenue was offset, however, by fair value losses and credit-related costs that stemmed from adverse market conditions, including a widening of credit spreads and higher-than-expected declines in home prices and loan loss severity during the first three months of the year.
The net loss was sharply wider than an 81¢ loss forecast by analysts, but investors may have been relieved it was smaller than Fannie's loss of $3.80 in the fourth quarter. The shares gained 8.9% on May 6, to close at 30.81.
A Nod from OFHEO
The government-sponsored enterprise ended the March quarter with $42.7 billion in core capital, $5.1 billion over the company's current regulatory requirement that it maintain a 20% cash surplus on its balance sheet.
Washington-based Fannie Mae also said it will raise $6.0 billion in capital through public offerings of common stock, mandatory convertible preferred stock, and nonconvertible preferred stock. It will also cut its quarterly dividend to 25¢ per share, starting in the third quarter, which will free up about $390 million in cash per year.
Fannie Mae's quarterly release coincided with an announcement by the Office of Federal Housing Enterprise Oversight, or OFHEO, that it had lifted the May, 2006 consent order, which required that the company strengthen its accounting procedures, internal controls, and corporate governance, among other things. Investors heaved a sigh of relief after a similar announcement when Fannie announced its fourth-quarter 2007 results in February.
On May 6, OFHEO said it plans to lower its capital surplus requirement from 20% to 15% once the company completes its capital-raising effort and to reduce it further to 10% in September as long as Fannie can maintain excess capital well above OFHEO's requirement and keep up its regulatory compliance. OFHEO reduced its cash surplus requirement to 20%, from 30%, on Mar. 19.
Mark-to-Market Loss
Once the surplus cash requirement falls to 10%, that should allow Fannie and its main competitor, Freddie Mac (FRE), to invest in at least $350 billion of additional mortgages, says Robert Napoli, an analyst at Piper Jaffray (PJC) in Chicago.
While he expects Fannie's credit losses to get larger into 2009, the more important point for investors is that Fannie, between its revenue growth, efforts to raise capital, and lower cash surplus requirements from OFHEO, is likely to have more than enough balance-sheet strength to "reduce the need for them to raise substantially more dilutive capital," he says. "Credit losses are going to go up in 2009, but people feel they have far more than enough capital to manage their credit losses.