Fannie posts big loss, cuts dividend

Mortgage finance giant Fannie Mae reported a $2.3-billion second-quarter loss, slashed its dividend and said it would stop buying or guaranteeing loans made to people who supply little proof of income.

The Washington-based company, the largest U.S. buyer and backer of home loans, also said it would raise its fees, which are likely to be passed on to borrowers in the form of higher interest rates or fees.

With Fannie Mae and its sibling, Freddie Mac, becoming more risk-averse, fears are building that higher mortgage rates will make it harder to buy or refinance a home, spurring more foreclosures.

“We are already in that spiral,” said Chris Mayer, a real estate professor at Columbia Business School.

Fannie Mae Chief Executive Daniel Mudd said the company still expected its losses to peak this year but wouldn’t predict how long the housing recession would last or how low prices would go.

“The housing market has returned to Earth fast and hard,” Mudd said.

Fannie’s shares sank 90 cents, or 9%, to $9.05.

The company said it lost $2.3 billion, or $2.54 a share, more than three times the 68-cent loss expected by analysts. A year earlier, Fannie earned $1.95 billion, or $1.86 a share.

Fannie cut its dividend to 5 cents a share from 35 cents, saving $1.9 billion through 2009.

Investors fear that Fannie and Freddie, which together own or guarantee nearly half of the country’s outstanding mortgage debt, will be overwhelmed by losses and require government aid.

Under a federal housing bill enacted last week, the government may boost lines of credit to the firms or buy their stock.

Mudd, however, said the company had no plans to use that financial lifeline. “We’re going to manage our way through it,” he said.

Fannie and Freddie generally had higher standards than the mortgage industry as a whole but lowered them during the housing boom and bought securities linked to riskier loans.

Such loans made up about 10% of Fannie and Freddie’s portfolios but accounted for more than half of their second-quarter loan losses. They were concentrated in California, Florida, Nevada and Arizona, where home prices soared.

If Freddie Mac follows Fannie Mae and stops buying loans in which the borrower’s income isn’t fully documented, “it means that market is not going to exist at all. It’s barely hanging on now,” said Guy Cecala, publisher of Inside Mortgage Finance.

Fannie said it would open offices in California and Florida to manage the sale of foreclosed homes and would consider selling such properties in bulk to investors.

“I do not think this is a time to be holding on to [foreclosed properties], hoping for a better day,” Mudd said.