Federal regulators have formally lifted many restrictions imposed on government-chartered mortgage financer Fannie Mae in the wake of accounting and management scandals, even as the company reported a $2.2 billion first-quarter loss and predicted losses will grow in 2009.
In lifting a 2006 consent order, the Office of Federal Housing Enterprise Oversight said Tuesday that "two years of hard work" by Fannie Mae officials had resolved many internal accounting and management problems. Regulators will continue reducing surplus capital requirements imposed on Fannie Mae after the company was forced to restate several years of earnings, OFHEO said.
On March 1 OFHEO removed a cap on the size of Fannie Mae’s mortgage portfolio — loans or mortgage-backed securities the company holds for investment.
About three weeks later, OFHEO reduced a 30 percent capital surplus requirement imposed in a May 2006 consent order to 20 percent, giving Fannie Mae more leeway to guarantee and purchase mortgages.
Fannie Mae officials said OFHEO plans to further reduce the capital surplus requirement to 15 percent after the company completes a plan to raise $6 billion in capital through public offerings including $4 billion in common and convertible preferred stock and by slashing dividends to 25 cents per share beginning in the third quarter.
Fannie Mae must raise more money even as OFHEO relaxes its capital requirements because of mounting losses.
During the first quarter, Fannie Mae boosted loss reserves to $5.2 billion, up from $3.4 billion at the end of 2007 and $930 million a year ago. The company’s credit loss ratio has nearly quadrupled from a year ago, growing from 3.4 basis points to 12.6 basis points, and is expected to continue growing into 2009.
"We expect severe weakness in the housing market to continue in 2008," Fannie Mae officials said in a regulatory filing, with national home-price declines of 7 to 9 percent and steeper declines in certain areas such as Florida, California, Nevada and Arizona.
While those four states represented only 27 percent of Fannie Mae’s single-family conventional mortgage credit book of business, they accounted for 33 percent of credit losses for the first quarter of 2008, compared with 3 percent a year ago, the company said.
Higher-risk loan categories including alt-A loans, subprime loans and loans to borrowers with low credit scores represented 25 percent of the single-family book of business, but accounted for 66 percent of credit losses.
At the end of the quarter, Fannie Mae owned $108.3 billion of private-label mortgage-related securities backed by alt-A, subprime, commercial, manufactured housing and other mortgage loans, down from $111.1 billion at the end of 2007.
As of March 31, 2008, Fannie Mae’s core capital of $42.7 billion exceeded the OFHEO-directed minimum capital requirement by $5.1 billion, or 13.5 percent. That compares $45.4 billion in core capital at the end of 2007, an amount that provided only a 9.3 percent cushion under the 30 percent surplus requirement.
The additional leeway granted by regulators came too late to have a dramatic impact on Fannie Mae’s first quarter results, with the company’s net mortgage portfolio shrinking a little less than 1 percent from the end of 2007, to $716.5 billion as of March 31.
Although Fannie Mae began acquiring jumbo conforming loans of up to $729,750 in April, those purchases didn’t show up in the results for the first three months of the year.
Nevertheless, Fannie Mae increased its total mortgage credit book of business by 3 percent during the quarter, to $3 trillion, while boosting the company’s share of mortgage securitizations to 50.1 percent, up from 48.5 percent in the fourth quarter and 25.1 percent a year ago.
Fannie Mae has also increased the fees it charges to guarantee payments to investors who buy it mortgage-backed securities by 35 percent from a year ago, to 29.5 basis points.
That helped first-quarter-2008 net revenues grow 21.8 percent from the previous quarter and 38.2 percent from a year ago, to $3.8 billion. The fees Fannie Mae earns from loan guarantees grew by 8.1 percent from the previous quarter, to $1.8 billion.
Those guarantees also account for much of the company’s risk, with "severe deterioration" in housing markets leading the company to increase provisions for credit losses by $2.9 billion.
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