Tuesday, December 4, 2007

It ain't over 'til the fat lady sings and dances and her pictures get plastered all over the Internet

Fannie Mae could face more losses

A look at the bonds it holds, and the extent to which Fannie has marked them down so far, indicates that it may see as much as $5 billion more in write downs. Peter Eavis reports.

(Fortune) -- Could Fannie Mae be the next large financial company to announce billions of dollars of market losses on bonds backed by distressed mortgages?

The vast majority of Fannie Mae's mortgages are loans to borrowers with good credit, but over the past five years the government sponsored enterprise became exposed to mortgages that were made to people with poor credit -- subprime mortgages -- and to mortgages that were made with incomplete documentation of borrowers' income, called Alt-A mortgages in industry parlance.

One way that Fannie increased its exposure to subprime and Alt-A mortgages was to buy bonds backed with these types of loans. While these subprime and Alt-A mortgage-backed bonds are only a small proportion of Fannie's overall mortgage holdings, their combined value of $76 billion is almost double Fannie's $40 billion of capital, which is the net worth of a company and the last cushion against losses.

Losses are climbing on these loans as borrowers default, which has caused the market value of bonds backed with such loans to fall sharply. Investors are bidding down the value of mortgage bonds in anticipation that defaults will prevent many of the bondholders from being paid back in full.


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