Fannie Mae Risks Won’t Rise With Bigger Loans

January 29, 2008 - Fannie Mae, the largest source of money for U.S. home loans, would avoid taking on excessive risk under a government plan allowing it to buy home loans as high as $729,500, Chief Executive Officer Daniel Mudd said.

The plan, which received bipartisan support last week as part of a broader package to revive the economy, will add more liquidity to the market for so-called jumbo loans, Mudd said today in an interview on Bloomberg Television. Washington-based Fannie Mae and smaller competitor Freddie Mac in McLean, Virginia are restricted from buying loans higher than $417,000.

“It’s wrong to say, ‘There is a magic line between $417,000 and $418,000, one part is not risky, one part is risky,”‘ Mudd said. “We will follow the same risk policy, the same underwriting criteria, the same conservative philosophy.”

Treasury Secretary Henry Paulson agreed to the loan limit provision after gaining assurances that lawmakers would pass legislation strengthening oversight of the companies. The Treasury has tried since 2003 to get Congress to create a stronger supervisor for Fannie Mae and Freddie Mac in response to $11.3 billion in accounting misstatements at the companies.

Fannie Mae, which reported a third-quarter net loss of $1.4 billion and has said rising foreclosures impaired fourth-quarter earnings, confronts a “tough year” in 2008, Mudd said. “A lot of the trends we saw in the latter half of 2007 have rolled right into 2008.”

The losses forced Fannie Mae last month to shore up capital by raising $7 billion in a sale of preferred stock. The company’s capital is now “in good shape,” Mudd said.

Fannie Mae “cut administrative expenses by $200 million” in 2007, Mudd said today in a speech in New York. “We will go into ‘08 with a normalized run rate.”

Edge of a Recession

Fannie Mae is projecting an economy that “is just on the edge of a recession or a mild recession.” That varies by region, he said.

While housing markets are especially slow in the upper Midwest, Florida and California, in “large swaths of the rest of the country, consumers are saying, ‘What’s the big point, we’re not seeing it?”‘ Mudd said.

Fannie Mae rose 15 cents to $32.84 as of 11:40 a.m. in New York Stock Exchange composite trading.

Home Prices

Congress created Fannie Mae and Freddie Mac to increase mortgage financing by buying loans from lenders. The publicly traded companies profit by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. They record losses when defaults rise.

Senate Banking Committee Chairman Christopher Dodd and other lawmakers have urged the Bush administration for more than six months to ease constraints on Fannie Mae and Freddie Mac to help revive the housing market. Single-family property prices last year posted their first annual decline since the Great Depression, the National Association of Realtors said yesterday.

Mudd earlier this month estimated that U.S. home prices could fall 12 percent from their peak through 2010.

Fannie Risks Won’t Rise With Bigger Loans, Mudd Says
By Kathleen Hays and James Tyson | Copyright 2008 Bloomberg