By Dawn Kopecki for Bloomberg, November 6, 2009
Fannie Mae, the mortgage buyer seized by regulators, plans to tap emergency U.S. capital for a fourth time this year, bringing its draws of taxpayer money to $60 billion as the company sees no immediate end to its losses.
Fannie Mae will seek $15 billion in Treasury Department financing after posting an $18.9 billion third-quarter net loss, according to a Securities and Exchange Commission filing late yesterday. The Washington-based company, which posted $101.6 billion in losses over the previous eight quarters, has already tapped $44.9 billion from the $200 billion emergency lifeline.
“They’re going to need that $200 billion in capital, if not more, when this thing’s all said and done,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.
The Treasury Department is also holding up an agreement Fannie Mae reached in the third quarter to sell about $2.6 billion in low-income housing tax credits, the company said. The company may have to write down the value of the credits and take a charge if it can’t find a use for the credits.
Losses will continue and the company remains “dependent on the continued support of Treasury to continue operating,” Fannie Mae said in the filing. The company said any profit it does make would be eaten up by $6.1 billion in annual dividend payments owed on the Treasury borrowings, a cost that exceeded its annual net income for five of the past seven years.
The payment “will contribute to increasingly negative cash flows in future periods if we continue to pay the dividends on a quarterly basis,” Fannie Mae said.
Treasury officials are considering whether to let Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, buy some of the tax credits. The purchase would lower the investment bank’s tax bill. Fannie Mae has accumulated about $5.2 billion in the credits, and hasn’t been able to recognize the majority of the tax benefits because it hasn’t been profitable since 2007.
Fannie Mae, which owns or guarantees more than 20 percent of the $12 trillion U.S. home-loan market, has been hobbled by a three-year housing slump that has wiped 28 percent off home values nationwide and led to record foreclosures. Fannie Mae Chief Executive Officer Michael Williams said Sept. 9 that the housing market still had a “long road ahead” to recovery and investors and borrowers should remain cautious.
The company estimates that home prices have fallen 15.6 percent from their peak in the third quarter of 2006. Home prices will drop 6 percent in 2009, less than the 7 percent to 12 percent drop predicted, the company said yesterday. Fannie Mae also revised its forecast for peak-to-trough price declines to between 17 percent and 27 percent, from 20 percent to 30 percent.
Fannie Mae shares, which peaked at $87.81 in December 2000, closed at $1.12 yesterday in New York Stock Exchange trading.
A record 2.6 million defaults, scheduled foreclosure auctions or bank repossessions occurred in the first nine months of this year, 22 percent more than a year earlier, as unemployment rates climbed and temporary programs delaying foreclosure expired, according to Irvine, California-based data company RealtyTrac Inc.
Inventory-to-sales ratios remain high and additional foreclosures may put further pressure on home prices, Fannie Mae said. About 3.9 million homes are for sale, and as many more homes with mortgage payments that are at least 90 days past due make up a “shadow” foreclosure inventory waiting to come onto the market, according to the Mortgage Bankers Association.
Fannie Mae and smaller rival Freddie Mac were chartered by the government primarily to lower the cost of homeownership by buying mortgages from lenders, freeing up cash at banks to make more loans. The companies make money by financing mortgage-asset purchases with lower-cost debt and by charging fees to guarantee securities they create out of home loans from lenders.
The Federal Housing Finance Agency put Fannie Mae and Freddie Mac under its control in September 2008, and forced out management after examiners said the two may be at risk of failing amid the worst housing slump since the Great Depression.
McLean, Virginia-based Freddie Mac, which posted a second- quarter profit partly because of one-time accounting adjustments and mark-to-market gains, has tapped $50.7 billion in aid since November 2008.
Fannie Mae’s net worth, or the difference between assets and liabilities, was negative $15 billion as of Sept. 30, compared with negative $10.6 billion on June 30 and negative $18.9 billion on March 31, according to company statements.
Federal homebuyer tax credits and financing programs have sparked demand for homes and led the housing industry to contribute to U.S. economic growth for the first time in four years last quarter. Sales of existing homes surged a record 9.4 percent in September, to a 5.57 million annual rate, the highest in more than two years, according to National Association of Realtors data.
The mortgage market is still dependent on government- affiliated programs, with private banks providing just 10 percent of loan liquidity, down from about 60 percent in 2006, Williams said in September. Fannie Mae and Freddie Mac are responsible for about 70 percent of all new mortgages this year, while the Federal Housing Administration accounts for about 20 percent, Williams said.
The House and Senate this week voted to extend the $8,000 first-time homebuyer tax credit through April 30, and expand the program to include people with higher incomes and some who already own homes. The bill is being sent to President Barack Obama to sign into law.
The fair value of Fannie Mae’s assets was negative $90.4 billion last quarter, compared with $102 billion at the end of June. Fannie Mae increased reserves for future credit losses to $65.9 billion last quarter from $55.1 billion in the previous quarter.
The amount of nonperforming loans that Fannie Mae guarantees for other investors rose to $163.9 billion from $144.2 billion in the second quarter, according to the filing. Fannie Mae also owned $34.2 billion in non-performing loans as of Sept. 30, up from $26.3 billion in the second quarter.
“In absolute dollar terms, you’re still looking at outlandish growth in nonperformers, which tells you that reserves will continue to increase,” Miller of FBR Capital Markets said. “So you can’t tell when this thing is going to be profitable or if they are reserving correctly.”