Fannie takes a dump

February 27, 2008 – 9:53 am

Fannie Mae reported earnings this morning. They’re not pretty:

The mortgage-lending giant reported net loss of $3.56 billion, or $3.80 a share, compared to year-earlier net income of $604 million, or 49 cents a share.

The company recorded negative revenue, including derivative and investment losses, of $2.25 billion. Year-earlier revenue was $1.75 billion.

The mean per-share loss estimate of analysts polled by Thomson Financial was $1.24 on revenue of $1.33 billion.

Credit costs continued to rise as the company posted a $2.79 billion provision for loan losses, compared with $221 million a year earlier.

The company also recorded $1.13 billion in investment losses compared with a year-earlier gain of $75 million. Derivative losses ballooned from $668 million.

Fannie said its “serious delinquency rate” as of Dec. 31 climbed to 0.98% from 0.65% a year earlier.

The Journal made the point yesterday that Fannie may not be saved by the fact that most of its loans are of the prime variety. Sure, subprime delinquencies remain far higher (and Fannie has enough of these to potentially wipe out its capital base). But as home prices continue to decline, millions of “prime” borrowers may find themselves upside down: owing more on their mortgage than their house is worth.

And home prices are certainly falling: yesterday Case-Shiller reported housing prices fell 8.9% in the fourth quarter. That’s 8.9% nationally. [So much for realtors' rosy predictions......]

Upside down borrowers, prime or not, have an incentive to simply walk away from their homes. The borrower has to move and absorb a hit to his credit rating sure. But seems to me that’s better than paying off a $400,000 mortgage on a home now worth $300,000. Is avoiding the word “foreclosure” on your credit report worth $100,000?

Not to most people I’d imagine.

And it’s not as if upside down borrowers have any equity left at stake. That they’ve already lost.

So as house prices continue to fall, subprime, AltA and prime borrowers that bought at the top will have an incentive to walk away.

Fannie will be absorbing losses for years as the housing collapse gains steam. My bet is that, absent a large taxpayer bailout, Fannie (& Freddie) will go under.

But the government can’t let that happen; the carnage in financial markets could be too severe. So bet on a taxpayer bailout.

……………….
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