More pain at Fannie - $2.3 billion loss

More pain at Fannie - $2.3 billion loss
Mortgage finance giant suffers much larger-than-expected loss due to reserves for credit losses and slashes its dividend to preserve capital.

NEW YORK (CNNMoney.com) -- Mortgage finance giant Fannie Mae reported a much larger-than-expected loss in the second quarter and slashed its dividend Friday, more signs that the problems in housing and financial markets are not over.

The firm reported a net loss of $2.3 billion, or $2.54 a share. Analysts surveyed by Thomson Reuters forecast a loss of 68 cents a share, compared to earnings of $1.86 a share a year earlier. But large increase in reserves for bad debt and a writedown in the value of its holdings hurt the results.

The company warned of billions more in credit losses this year than it had previously forecast, and said the rate of credit losses is likely to get even worse next year.

"Volatility and disruptions in the capital markets became even more pronounced in July," said Daniel Mudd, Fannie's chief executive. "[C]redit performance has continued to deteriorate and ... we anticipate further increases in our combined loss reserves."

Fannie Mae also gave a gloomier forecast on the battered housing market, saying that the range of price declines is likely to be at the upper end of its previous forecast of a 7% to 9% drop in 2008.

Fannie also slashed its quarterly dividend to 5 cents a share, down 86% from its previous level, as the company tries to maintain the capital reserves it needs to operate.

Shares were down nearly 13% in pre-market trading after the report.

The company announced it would pull out of the so-called Alt. A loan business by the end of the year. Those loans, made to borrowers who do not provide full or any verification of their income, have been responsible for most of the company's losses, even though they are a small percentage of their overall business.

The rising loan losses caused Fannie to set aside an additional $3.7 billion for credit losses yet to come. It also saw actual credit losses in the period of $1.3 billion, a jump of more than 400% from a year ago, and up 44% from the first quarter of this year.

Fannie (FNM, Fortune 500) and sibling company Freddie Mac (FRE, Fortune 500) are shareholder-owned companies set up by the government to provide funding to banks and other lenders making home loans.

They buy loans, attach a guarantee, then sell securities backed by the loans' income stream. They have been badly hurt in the last year by the sharp decline in home prices and the rise in mortgage delinquencies and foreclosures.

Between them they back or own more than $5 trillion in single family home loans, or roughly half the outstanding U.S. mortgages. The troubles in the housing and credit markets led to shares of both firms plunging in the last two months.

That, in turn, prompted Congress to authorize a rescue plan that would have the Treasury Department loan the firms unlimited amount of money or buy their equity if necessary.

On Wednesday, Freddie reported a much larger-than-expected loss due to the bad loans and slashed its dividend at least 80% in an effort to retain capital it needs to operate.

Shares of both companies tumbled further on that report in Wednesday trading and again Thursday, leaving Fannie shares off 61% between June 16 and Thursday's close. Freddie shares are off 75% in the same period.

CNN