A Look at GSE 2007 Earnings; Ouch!
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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.
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