Tech & Biz

Fannie Mae loses $2.3B in quarter as defaults rise

by kferaday | August 8, 2008 at 09:32 am

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More bad news in the U.S. housing sector -- which is bad news for the U.S. (and other) economies. You have to wonder why Fannie Mae would respond by raising prices for borrowers. Won't this ultimately lead to more defaults? You'd think they would prefer to refinance existing loans at lower rates to maintain at least some of the value.

Fannie Mae swung to a second-quarter loss that was more than triple what Wall Street expected as conditions in the housing market continued to deteriorate, forcing the mortgage finance giant to make bold cutbacks that will send shock waves through the mortgage market.

Fannie Mae is raising fees, which will be passed onto borrowers as higher interest rates, and abandoning "Alt-A" borrowers because those loans are defaulting at an alarming rate. These high-risk loans — made to borrowers with solid credit but little proof of their income, or small or no down payments — made up about 11 percent of Fannie's portfolio but accounted for more than half of its credit losses in the quarter.

Some good analysis from Investors.com:

Freddie Mac's (FRE) financial situation went from bad to worse Wednesday after the embattled mortgage finance giant said second-quarter losses were far larger than anticipated.

The question now is how the company will raise billions in needed capital without a huge injection of cash from the U.S. government.