May 11, 2010

Fannie Mae Reports Steep Loss, Requests $8.4 Billion Bailout

Deficit narrows in first quarter when compared with Q4 2009

Fannie Mae is once again asking taxpayers to shore up its balance sheet. The government-sponsored entity on Monday, May 10, reported a net loss of $11.5 billion in the first quarter of 2010, compared with a net loss of $15.2 billion in the fourth quarter of 2009. The first-quarter results were blamed primarily on credit-related expenses, "which remain at elevated levels due to weaknesses in the economy and the housing market," according to the GSE. As a result, it asked the Treasury to provide $8.4 billion either on, or prior to, June 30.

The move was far from unexpected, according to Michael Sadoff, an investment advisor and Fannie Mae watcher with Milwaukee-based Sadoff Investment Management LLC.

"Going back to 2005 and 2006, we've monitored the ongoing mess and realized a turnaround would take quite a bit of time," Sadoff says. "They've got to take care of this, get right again and then think about a smaller, decentralized model to ensure this doesn't happen again."

He notes it's unlikely this will be the last time the agency comes looking for help, and "there will be further pain to go through."

"We've had our eye on publicly-traded home builder stocks for a while," he adds. "We didn't buy technology stocks in 1999, but we hold them now. Similarly, we believe home builder stocks are close to bottoming out. Some bullish signs tell us we're almost there, but every time we think we're close they seem to fail again."

During the first quarter of 2010, Fannie Mae purchased or guaranteed an estimated $191.4 billion in loans, measured by unpaid principal balance, including approximately $40 billion in delinquent loans purchased in March from mortgage-backed securities trusts.

Including $1.5 billion of dividends on its senior preferred stock held by the U.S. Treasury, the net loss attributable to common stockholders was $13.1 billion, or ($2.29) per diluted share, compared with a loss of $16.3 billion, or ($2.87) per diluted share, in the fourth quarter of 2009.

"Promoting sustainable homeownership and maintaining ready access to liquidity are our guiding principles in serving the residential markets," Fannie Mae President and CEO Mike Williams said in a statement. "The strong credit characteristics of our acquisitions during the quarter are evidence that we continue to strike an appropriate balance in providing liquidity while also applying the lessons of the recent credit cycle."

John Sullivan is editor-in-chief of Boomer Market Advisor and AdvisorBiz.com, part of Summit Business Media's Advisor Media Group.

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