S&P: BULLETIN: Fannie Mae Reports $29 Billion Third-Quarter Loss; Ratings Unaffected

NEW YORK Nov. 10, 2008--Fannie Mae today reported a sizeable $29 billion loss in third-quarter 2008 due to its establishment of a $21.4 billion deferred tax-asset valuation allowance and a large $9.2 billion credit-loss provision.

This quarterly loss has no impact on Standard & Poor's Ratings Services' ratings on Fannie Mae's 'AAA/A-1+' senior debt, 'A' subordinated debt, or 'C' preferred stock, since Fannie Mae is operating under a regulatory conservatorship.

(S&P analysts Victoria Wagner, top right photo, and Daniel E. Teclaw, authored the special report.)

The establishment of the valuation allowance for the deferred tax asset reflects the high degree of uncertainty surrounding Fannie Mae's earnings as it operates under conservatorship.

We believe that Fannie Mae's business plan, while under conservatorship, will be geared primarily to fulfilling its public policy role of providing mortgage liquidity to the U.S. housing markets.

With this as its main business focus, we believe Fannie Mae's core profitability metrics will suffer and any initiatives to improve its core earnings will be of secondary importance.

(Treasury Department building, Washington, DC, middle left photo)

Other significant charges in the quarter contributing to what we view as the rather sizeable loss include a $9.2 billion charge for credit–related expenses, which includes a $6.7 billion increase to the provision for credit losses, and fair-value losses of $3.9 billion.

The credit-loss provision was much greater than the previous quarter's and reflects Fannie Mae's attempts to buttress loss reserves in 2008 as it expects loan losses to peak in 2009.

Total non-performing assets were $71 billion, or 2.4% of the total guarantee book of business plus foreclosed properties; and the credit-loss ratio reached 29.7 basis points (bps) annualized for the third quarter and 20.1 bps for the first nine months of 2008. We expect this level of losses to double in 2009.

Fair-value gains and losses continue to be sizeable, given the current illiquidity for mortgage-related assets and the widening of their related spreads.

Also, interest rate derivatives not in designated hedge positions continue to add to fair-value loss volatility on Fannie Mae's income statement.

The key figures include a $3.3 billion interest-rate derivative fair-value loss and a $2.9 billion trading loss.

The final remaining notable charge in the third quarter was the $1.8 billion of other-than-temporary-impairment charges taken on Fannie Mae's holdings of private-label Alternative-A and subprime mortgage-backed securities, which were recorded as investment losses in the quarter.

These sizeable losses have, in our opinion, severely worsened Fannie Mae's capital position, as it ended the quarter with generally accepted accounting principals (GAAP) equity of $9.3 billion.

Fannie Mae's regulatory capital requirements have been suspended while it's under conservatorship, but, as a result of conservatorship, must maintain a positive GAAP equity position.

Therefore, we now expect it to be highly likely that Fannie Mae will access the U.S. Treasury's senior preferred stock purchase program early next year.

Media Contact:

Jeff Sexton, New York, (1) 212-438-3448 jeff_sexton@standardandpoors.com

Analyst Contacts:
Victoria Wagner, New York (1) 212-438-7406
Daniel E Teclaw, New York (1) 212-438-8716