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Fannie Mae seeks $19 billion in aid after 1Q loss

May 09, 2009|Zachary A. Goldfarb | Goldfarb writes for the Washington Post.

Fannie Mae reported Friday that it lost $23.2 billion in the first three months of the year as mortgage defaults increasingly spread from risky loans to the far-larger portfolio of loans to borrowers who have been considered safe.

The massive loss will prompt a $19-billion infusion from the government to keep the mortgage lender solvent, on top of a $15-billion investment of taxpayer money earlier this year.

The sobering earnings report was a reminder of the far-reaching implications of the government's takeover last September of Fannie Mae and the smaller Freddie Mac.

Even as the cost of the government bailout of banks appears to be leveling off, the federal rescue of Fannie and Freddie is rapidly growing more expensive.

Moreover, in contrast to the infusions of funds into banks, taxpayer money invested in Fannie and Freddie is probably lost forever because the prospects for repayment are slim, analysts say.

But the government remains committed to keeping the companies afloat because it is relying on them to help reverse the continuing slide in the housing market and to keep mortgage rates low.

Fannie Mae said that its losses would continue through at least much of the year and that it "therefore will be required to obtain additional funding from the Treasury." Analysts estimate that the company could need at least $110 billion.

Freddie Mac, which has been in worse financial shape than Fannie Mae, has obtained $45 billion in taxpayer funding. Freddie is expected to report earnings in coming days.

Fannie's most recent loss compares with a $2.2-billion loss in the first quarter of last year, before the government takeover.

Washington-based Fannie Mae and McLean, Va.-based Freddie Mac have been growing ever more dependent on federal largess. The Federal Reserve has bought $366 billion of their mortgage securities and $70 billion of their debt, and has pledged to buy hundreds of billions of dollars more of both. The Treasury has committed to investing as much as $200 billion in each company to keep them solvent and has bought $124 billion of their mortgage investments.

In total, the government has committed about $2 trillion to supporting Fannie and Freddie and buying the securities they issue.

Over the next 10 years, the government's rescue of Fannie and Freddie is expected to cost $389 billion, exceeding the cost of investments in banks and other financial firms by the government's Troubled Asset Relief Program, according to a recent study by Subsidyscope, an initiative of the Pew Charitable Trusts. The group based its calculations on Congressional Budget Office figures.

The federal government seized Fannie and Freddie last September out of concern that the mortgage behemoths would collapse and threaten the entire financial system. Since then, the lenders have been called on to carry out large parts of the government's plan to spur a housing recovery by modifying mortgages and taking anti-foreclosure steps.

Fannie Mae said these programs were likely to have "a material adverse effect on our business, results of operations and financial condition, including our net worth." But it said the program could yield long-term benefits. "If, however, the program is successful in reducing foreclosures and keeping borrowers in their homes, it may benefit the overall housing market and help in reducing our long-term credit losses."

But in a filing, Fannie Mae said, "We expect that we will not operate profitably for the foreseeable future." The plight of Fannie and Freddie contrasts with the findings of federal "stress tests" done on the nation's 19 largest banks. The government announced Thursday that the tests indicated that probably only one bank, GMAC, required additional public aid. Fannie Mae's earnings results also contrast with reports in recent weeks by the biggest banks that they are returning to profitability.

Even ailing insurer American International Group Inc. said Thursday that it might not need more taxpayer dollars.

Jim Vogel, an analyst at FTN Financial, said the amount of taxpayer money that must flow to Fannie and Freddie would be clear in the coming months. He said it would depend on whether government efforts to keep people in their homes can make significant headway even as rising unemployment makes it more difficult for many to afford their loans.

"We need more to pass to see how people react to all the different plans to help people with mortgages and how people react to a prolonged period of unemployment," Vogel said.

According to analysts, Fannie Mae's financial assumptions aren't as bleak as those embodied in the government's stress tests of major banks. For the tests, the government assumed that the percentage of loans going bad in a portfolio would range from 1.5% to 4%. Fannie Mae assumes that only 1.45% of loans will be bad, suggesting that the company would have to come up with much more money to cover losses if a worse scenario comes to pass.

Fannie Mae and Freddie Mac own $5.4 trillion in assets, all of them mortgages or mortgage-related debt, which is performing worse than other loans.

By comparison, the total assets -- including mortgages but also other kinds of loans -- held by the 19 big banks that underwent stress tests is $7.8 trillion.

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