The government-sponsored enterprise (GSE) blamed the sharp losses - just $3 million less than the firm's losses for 2007 as a whole - on fair value losses and "credit-related expenses due to adverse market conditions", including widening credit spreads and higher than expected declines in house prices and loan losses during the first quarter.
The losses indicate that the situation in the US mortgage market remains bleak and has not improved from the last three months of 2007, which saw Fannie Mae and fellow GSE Freddie Mac chalk up losses of $3.56 billion and $2.5 billion respectively.
Although Fannie's net revenues grew from $3.1 billion in the fourth quarter of 2007 to $3.8 in the year to March 31, this hid the fact that many of the other underlying fundamentals on the balance sheet actually slipped further into the red.
Mark-to-market fair value loses rose to $4.4 billion from $3.4 billion for the previous quarter, credit-related expenses increased from $3 billion to $3.2 billion as charge-offs increased due to higher defaults and average loan loss severities, while funds allocated to loan loss reserves swelled from $3.4 billion to $5.2 billion, as Fannie Mae anticipates further losses going forward.
Despite ongoing market difficulties, Fannie Mae has continued to grow its mortgage credit book of business, filling the vacuum left by private label mortgage securitisers that fled in the market in droves in September and October last year. Fannie Mae's credit book grew 3% in the first three months of the year from $2.9 trillion to $3 trillion.
This disclosure will reignite the debate surrounding Fannie Mae's conflicting commitment to its private shareholders and its government mandate to keep the US mortgage market stable, accessible and affordable for homeowners. Recent announcements increasing the GSEs' ability to take up even more of the slack in the market, at the potential expense of their own fiscal health, have added fuel to that fire.
In March, the Office of Federal Housing Enterprise Oversight (Ofheo), the GSEs’ regulator, announced a 10% roll-back in capital surplus requirements - imposed on the entities after a series of accounting scandals came to light in 2004 – from 30% to 20%. The newly released funds, along with Fannie Mae's and Freddie Mac's existing capabilities, give the firms the capacity to take up to $200 billion in newly packaged mortgages or mortgage-backed securities (MBS) onto their own balance sheets, or guarantee up to $2 trillion of MBS for private investors.
Such moves to further increase the GSEs' already substantial footprint in the mortgage market will only further alarm shareholders dismayed by the losses so far announced. Fannie Mae has also revealed that it plans to raise an additional $6 billion in capital through public offerings of common and preferred stock, mimicking exactly Freddie Mac's capital-raising in December last year.
Fannie claims Ofheo is willing to further reduce its capital surplus requirements by 5% (to 15% overall) upon completion of the capital-raising plan and that the regulator has "indicated its intention" to roll the surplus back by another 5% to just 10% in September this year.
Were the same provision to be made for Freddie Mac, it would potentially free up a further $5.9 billion in capital - allowing the GSEs to purchase yet another $200 billion in new MBS or guarantee another $2 trillion in securitised mortgages for private investors.
A clearer picture of how the GSEs are collectively grappling with the turbulent market conditions will emerge on May 14, when Freddie Mac announces its first-quarter results.