OFHEO Lifts Consent Order on Fannie Mae; GSE Reports $2.2 Billion 1Q Loss

MBA (5/6/2008 ) Sorohan, Mike
The Office of Federal Housing Enterprise Oversight this morning announced that it had lifted its 2006 Consent Order on Fannie Mae. The action took place as Fannie Mae this morning reported a $2.2 billion loss in the first quarter and announced that it would launch a new effort to raise capital.
OFHEO Director James Lockhart III said lifting the Consent Order reflected “two years of hard work by Fannie Mae in remediating [its] problems.”

The GSE came under the consent order in 2006 amid allegations of financial irregularities stemming from accounting practices. Last month, OFHEO reached a financial settlement with Fannie Mae’s former chairman and CEO, Franklin Raines, and former chief financial officer Timothy Howard.

In a statement, Lockhart said OFHEO would continue its ongoing oversight of Fannie Mae. “OFHEO continues its OFHEO-directed requirement of a surplus over minimum capital, which was lowered from 30 to 20 percent in the March 19, 2008 agreement with Fannie Mae in return for their commitment to raise significant additional capital. The company announced such a capital raising initiative today,” he said.

Lockhart said OFHEO would further lower the OFHEO-directed requirement to 15 percent upon successful completion of the fundraising effort. OFHEO indicated to Fannie Mae its intention to reduce the OFHEO-directed requirement a further five percent in September based upon the company’s continued commitment to maintain capital well above OFHEO’s regulatory requirement and no material adverse changes to ongoing regulatory compliance.

“The lowering of the prudential cushion was appropriate in line with the company’s progress and with the need to maintain safe and sound operations,” Lockhart said.

Meanwhile, Fannie Mae this morning reported a first quarter net loss of $2.2 billion, coming on top of its fourth quarter 2007 net loss of $3.6 billion. The GSE said first quarter 2008 results were driven primarily by increased revenues from net interest income and guaranty fee income, which were more than offset by fair value losses and credit-related expenses due to adverse market conditions.

“During the first quarter we saw heightened volatility in the secondary mortgage market, credit spreads that widened out to 22-year highs and home prices that fell faster than expected,” said Fannie Mae President and CEO Daniel Mudd. “Our first quarter results, although an improvement over the last quarter, reflect these challenging market conditions.

Mudd noted that Fannie Mae “achieved another quarter of growth in our book of business and market share, and solid revenue growth from both our guaranty and investment businesses. This is likely to be the story for the months ahead—a painful cure from the housing correction—and incredibly healthy opportunities from our resurgent role at the center of the recovery. Both are happening at the same time.”

Fannie Mae also announced a plan to raise $6 billion in new capital through public offerings of common stock, non-cumulative mandatory convertible preferred stock and non-cumulative, non-convertible preferred stock.

Mudd said the new capital would enable Fannie Mae to maintain a strong, conservative balance sheet, enhance long-term shareholder value and provide stability to the secondary mortgage market.

“The additional capital we’re raising will bolster our ‘protect and grow’ strategy—it will allow us to maintain a strong, conservative balance sheet through the housing correction, pursue growth opportunities to enhance long-term shareholder value and provide liquidity and stability to the secondary market,” Mudd said. “Having a larger capital cushion will permit us to operate and grow from a position of strength.”

Fannie Mae’s Board of Directors said it plans to reduce the company’s quarterly common stock dividend beginning with the third quarter to $0.25 per share, which the GSE said would make available nearly $390 million of capital annually. In addition, Fannie Mae plans to announce a series of initiatives called “Keys to Recovery” during a conference call with investors and analysts in connection with today’s Form 10-Q filing.