Fannie, the largest buyer and backer of U.S. home loans, said Wednesday it lost nearly $3.6 billion in the fourth quarter of 2007 amid mounting home-loan delinquencies and soured bets on interest rates. Freddie is expected Thursday to report a $1.5 billion fourth-quarter loss.
Fannie, which gave a pessimistic housing outlook for 2008, said close to 90 percent of its fourth-quarter losses stemmed from investments it made based on the assumption that falling interest rates would cause mortgage values to appreciate.
Fannie's $3.56 billion quarterly loss more than doubled from a loss of $1.4 billion in the third quarter of 2007 and contrasts with a profit of $604 million in the same period a year earlier. The loss was equivalent to $3.80 a share, far steeper than the $1.24-per-share loss.
Through these investments, known as "interest rate swaps," Fannie tries to hedge against the risks of rising or falling interest rates. The mortgages on the company's books tend to rise in value when interest rates drop, and vice versa. But that bet hasn't worked out of late, as interest rates fell in the fourth quarter and the value of mortgages held on the company's books has fallen as well.
Fannie said Wednesday it expects U.S. home prices to fall by 5 percent to 7 percent this year. It earlier forecast a decline of 4 percent to 5 percent. Fannie Mae said it expects to lose money this year on 11 to 15 of every 1,000 mortgages held on its $2.4 trillion book, up from its earlier expectation of eight to 10 and a steep increase from four to six in 2007