Freddie Mac and Fannie Mae may have gotten good news from their regulator which lifted the corporations' portfolio caps, but their earnings reports for the year just ended were pretty devastating.

Fannie Mae released its 2007 earnings on Wednesday and Freddie Mac followed suit on Thursday morning. Both reported huge losses, the bulk of which occurred in the last quarter of 2007.

Fannie Mae reported a net loss of $2.1 billion or $2.63 per diluted share for 2007 compared to net income of $4.1 billion or $3.65 per diluted share in 2006. Losses in the fourth quarter of 2007 totaled $3.6 billion. The corporation reported derivative fair value losses of $3.2 billion in the fourth quarter and $4.1 billion for the year largely due to the impact of declining yields on interest rate swaps used to hedge the corporation's net assets.



Credit related expenses were $5 billion for the year and $3.0 billion in the fourth quarter. Half of the credit related expenses was due to an increase in combined loss reserves reflecting the severity of loan charge-offs in regions of the country experiencing rapid declines in housing values and/or weak economic conditions. Another credit-related expense was an increase in fair value losses on delinquent loans purchased from mortgage-backed securities trusts. This item increased to $1.4 billion in 2007 from $204 million in 2006.

Fannie Mae CEO Daniel H. Mudd said "We are working through the toughest housing and mortgage markets in a generation. Our results for 2007 reflect the challenging conditions in the market we serve. While we are pleased that demand for our mortgage guaranty businesses has surged ... this positive trend has been far outweighed by the negative financial impacts of rising mortgage defaults, falling home prices, and extraordinary disruptions in the credit markets."

Freddie Mac, the smaller of the two government sponsored enterprises (GSEs), reported even worse results. Over the course of the year it had a net loss of $3.1 billion, or $5.37 per diluted common share compared to net income of $2.3 billion or $3.00 per diluted common share in 2006. Of the year's loss, $2.5 billion or $3.97 per diluted share came in the fourth quarter of 2007.

Credit-related expenses, consisting of provision for credit losses and real estate owned operations expense, were $912 million for the fourth quarter, compared to $1.4 billion for the third quarter. These third and fourth quarter provisions included amounts related to increased estimates of incurred losses on mortgage loans associated with higher default rates, an observed increase in delinquency rates and increases in severity of losses on a per-property basis, driven in part by the declines in home sales and home prices.

Freddie Mac said it expects credit-related expenses to remain high relative to recent periods and to vary from period to period as the U.S. housing market remains under pressure.

Total credit losses, consisting of net charge-offs plus REO operations expense, were $236 million for the fourth quarter, $126 million for the third quarter and $499 million for the full-year 2007.

In addition, as a result of the continuing deterioration in the U.S. housing market, the company has revised its estimate of total credit losses for 2008 and 2009 to $2.2 billion and $2.9 billion, respectively.

In a press release issued by Freddie Mac, Richard F. Syron, chairman and chief executive officer commented, "Today's economy represents one of the most severe housing downturns in American history, and our results reflect that difficult environment as well as Freddie Mac's steadfast commitment to its important mission of providing liquidity, stability and affordability to the U.S. housing finance system. Throughout 2007, Freddie Mac worked tirelessly to protect distressed homeowners by stabilizing the conforming mortgage market and reducing mortgage foreclosures."

Looking ahead to 2008, Syron commented, "We remain extremely cautious as we enter 2008. If the economy weakens substantially from here - a possibility for which we need to be prepared as a company - it will have a further negative effect on homeowners across the country and drive credit costs higher. However, we have taken the steps to add capital, tighten our management of credit risk and institute pricing policies that are more consistent with the risk we bear. These actions should help us build the business for the future."

In spite of a dropping stock market on Thursday, both Freddie and Fannie were up slightly; Freddie trading late morning at $25.78 and Fannie at $27.80. The fifty-two week highs for the stocks were $68.12 and $70.57 respectively.