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$29 Billion Loss at Fannie

Net worth headed negative

November 10, 2008

By MortgageDaily.com staff

Fannie Mae reported a staggering quarterly loss and may see its net worth turn negative by the end of the year.

Third-quarter earnings were a $29 billion loss, financial data released today indicated. Losses worsened from a $2 billion second-quarter loss and a $1 billion loss during the third-quarter 2007.

Fannie took a $21.4 billion non-cash charge during the latest period to establish a valuation allowance against deferred tax assets. The firm had accumulated tax credits that it had expected to reduce taxes in future periods. But the charge reflects Fannie's current expectation that it would not generate enough income in future periods to realize the full value of these assets.

The Washington, D.C.-based company also took $9.2 billion in credit-related expenses in the third quarter tied to the ongoing deterioration in mortgage credit conditions and declining home prices. The credit-related include foreclosed property expense and reflect higher charge-offs and increased loss reserves on its book-of-business.

In addition, mark-to-market charges were taken.

The latest earnings report covers the period in which Fannie, and its government-sponsored rival Freddie Mac, were seized by their regulator the Federal Housing Finance Agency. That move was made as the two secondary lenders had become unable to fulfill their mission of providing liquidity to the U.S. mortgage market.

Fannie said its net worth fell to $9.4 billion on Sept. 30 from $41.4 billion on June 30.

"If current trends in the housing and financial markets continue to worsen, and we have a significant net loss in the fourth quarter of 2008, we may have a negative net worth as of Dec. 31, 2008," the report said. "If this were to occur, we would be required to obtain funding from Treasury pursuant to its commitment under the senior preferred stock purchase agreement in order to avoid a mandatory trigger of receivership under current statute."

Moody's Investors Service issued a statement indicating that Fannie's focus has been shifted from maximizing shareholder profitability to supporting the US housing market. Moody's noted that even when the company emerges from conservatorship, it may be unable to regain the franchise and same level of profitability.

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