Fannie Mae (NYSE:FNM) reported numbers on Tuesday, May 6, and it was not pretty again. The nation's largest mortgage buyer and backer racked up more losses and announced it needed to raise more capital. Concerns don't end there, as the company also reported continued severe weakness in the U.S. housing market. All of this compounds the already dismal situation that shareholders have been suffering through for the last year.
Fannie's Financials
For its 2008 first quarter Fannie Mae lost $2.2 billion ($2.57 per share) compared with a profit of $961 million (85 cents per share) one year earlier. The results were far worse than the 81-cent-per-share loss expected by analysts according to Thompson Financial. The losses hit as home-loan delinquencies continued to rise, and home prices fell more sharply than the company had expected. Mark to market losses in its loan portfolio rose to $4.4 billion from $3.4 billion in the fourth quarter of 2007, and credit related expenses rose to $3.2 billion from $3.0 billion. Combined loan loss reserves increased to $5.2 billion in anticipation of charge-offs to be recorded in 2008.
To combat the problems the company is facing, it needs to raise even more capital, which is becoming a recurring theme. Fannie Mae is raising another $6 billion in new capital through offerings of common and preferred stock. The company also announced it will reduce its dividend to $0.25 per share beginning in the third quarter, which should free up another $390 million annually. Overall all of this spells more doom and gloom for shareholders. Shares traded down nearly 11% in premarket trading, but during regular trading day recovered its losses and even turned positive. The stock is down more than 50% from a year ago, but I think it is still not a time to buy the shares. The fundamentals continue to deteriorate, share value is being diluted every quarter, and disappointing reports are becoming commonplace. (To learn more, see Why do share prices fall after a secondary offering?)
No Relief For Fannie, Freddie or the Industry
It is clear from all the recent data, and this news from Fannie Mae, that there is no relief on the immediate horizon for the housing market. This bodes poorly for Fannie Mae and sibling Freddie Mac (NYSE:FRE). Both companies have been seeing the problems mentioned above, and a 180-degree change in outlook needs to occur before their stocks look attractive. Fannie Mae said it expects "severe weakness" in the housing market to continue throughout this year, which indicates that the outlook change won't happen soon.
This is bad for Fannie and Freddie who are supposed to have the highest quality mortgages on their books, meaning that we will likely see continued worsening problems from companies who hold uglier mortgage portfolios like Countrywide Financial (NYSE:CFC), which might be bought by Bank of America (NYSE:BAC). (For more on housing woes, see Why Housing Market Bubbles Pop.)
This is also not good news for the U.S. economy. Despite GDP numbers pointing to the fact that the economy seems to be skirting an expected recession, with 0.6% growth over the last two quarters, things could still turn south. During an appearance on CNBC on Tuesday, Martin Feldstein, president of the National Bureau of Economic Research, said that the housing markets should be the main focus in this economy. He indicated that further severe declines in the housing markets would likely push the economy into recession. He thinks a recession is still likely, but on the bright side he said that recent data over the last months has lowered the case for recession. Whether or not we are headed for recession, I'd suggest not touching Fannie and Freddie until fundamentals turn around.
The Bottom Line
Fannie Mae reported another disappointing quarter, where it could not even satisfy Wall Street's low expectations. The company has been hammered by the housing market and expects the situation to be dire throughout the year. On top of the poor environment for the company, Fannie has had to raise more capital and lower its dividend, which spells further dilution for its shares. I would stay away from the shares of Fannie Mae and its sibling Freddie Mac.
For more on Freddie Mac and Fannie Mae, check out Fannie Mae And Freddie Mac, Boon Or Boom?
