Transcripts

Fannie Mae Continues To Falter

SUSIE GHARIB: Times are still tough in the housing market and that's putting pressure on Fannie Mae. The mortgage giant posted a massive second quarter loss today and expects credit losses to double over the next six months. Fannie lost $2.3 billion or $2.54 a share, almost four times bigger than estimated $0.68 loss. As Darren Gersh reports, some analysts think it could take eight years before the housing market fully recovers.

DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Fannie Mae's second quarter ended in June and it was a bad one. And CEO Daniel Mudd said on today's conference call the news got even worse in July.

VOICE OF DANIEL MUDD, PRES & CEO, FANNIE MAE: We experienced higher defaults and higher loan loss severity in markets that were experiencing the steepest home price declines and that gave us higher charge-offs than we had experienced in any month in the second quarter.

GERSH: Fannie charged off $1.3 billion in bad loans and foreclosure expenses in the second quarter and the mortgage giant expects its credit losses will double over the next six months. Experts say that would translate into charge-offs of roughly $4 to $5 billion over the rest of the year. Analyst Gary Gordon figures Fannie Mae has reported only a fraction of its likely total losses from the housing crash.

GARY GORDON, MANAGING DIRECTOR, PORTALES PARTNERS: Fannie Mae probably loses $30 to $40 billion over the next five to eight years. Housing cycles can take a long, long time and will be suffering from this - - people could be losing their homes because of this five, seven years from now.

GERSH: Almost half of Fannie's credit losses in the quarter were on so-called alt-A loans, many of which were taken out to buy investment properties. But at the end of June, Fannie still had $340 billion worth of alt-A loans on its books. Today's loss from Fannie Mae and a gloomy report from Freddie Mac on Wednesday underscore why Congress moved to rescue the two mortgage giants. Housing finance expert Alex Pollock says bond buyers around the world needed to know the $5 trillion in debt Fannie and Freddie back will be honored.

ALEX POLLOCK, RESIDENT FELLOW, AMERICAN ENTERPRISE INSTITUTE: The real capital of Fannie and Freddie is not what you find in the balance sheet. It's this explicit ability of the government to lend or invest in Fannie Mae and Freddie Mac without limit.

GERSH: Fannie Mae expects its credit losses will peak this year, but just in case, it is once again raising the fees it charges to insure mortgages. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.