Fannie Mae: Loan losses to rise in '08

WASHINGTON - Fannie Mae warned investors yesterday that its losses would mount next year from bad home loans, even as the mortgage-finance company took steps to stabilize its finances.

A day after announcing it would sell stock and cut its dividend, Fannie Mae also disclosed in a regulatory filing that its mortgage investments declined $9 billion in November from the prior month, as it sold some to raise capital.

Fannie and its smaller government-sponsored rival Freddie Mac have been forced to set aside billions of extra dollars to account for bad loans, eroding their profits at a time when home prices are falling and foreclosures are rising on high-risk mortgages made to borrowers with weak credit histories.

Fannie said it expected U.S. home prices to fall 10 percent to 12 percent from their peak before the housing market could rebound.

In 2008, Fannie expects to lose money on eight to 10 of every 1,000 mortgages held in its $2.4 trillion portfolio, the company said yesterday. That would be a steep increase from 2007, when it expects four to six out of every 1,000 mortgages to be money-losers.

The Washington company, which finances or guarantees one of every five home loans in the United States, made the disclosure as part of a sales pitch to prospective investors in its planned share offering. Fannie also estimated that its portfolio of mortgages and related securities declined to about $723 billion in November from $732.29 billion in October.

Fannie shares climbed 95 cents, or 2.7 percent, to close at $36.13 on the New York Stock Exchange, after losing $1.07 Tuesday.