Wait for FNM's Next Capital Raise

Fannie Mae (FNM - commentary - Cramer's Take) reported a first-quarter 2008 loss of $2.57 per share compared to a loss of $3.80 per share in the fourth quarter of 2007. The Street was looking for a loss of 81 cents per share, with the lowest estimate being a loss of $2.40 per share. While net revenue was up to $3.8 billion from $3.1 billion in the fourth quarter on higher net interest income and higher guarantee fees, the provision for loan losses and foreclosed property expenses increased to $3.2 billion from $3.0 billion in the fourth quarter, and fair value losses increased from $3.4 billion to $4.4 billion because of wider credit spreads on trading assets and interest rate declines, which kept derivatives losses high.

Hedge accounting adoption will lead to derivative losses being much less of an earnings factor, and credit spreads are probably not going up much from here (I hope).

The provision for the increase in the loan and guarantee losses was 40 basis points, building the loan loss reserve to 18 basis points. The actual losses rose to 12.6 basis points in the quarter from 8 basis points in the fourth quarter. Charge-offs net of recoveries were at 6.0 basis points vs. 4.6 basis points in the last quarter, and foreclosed property expense was at 3.6 basis points, up 0.1 basis points. Asked why they had made the increase to the provision, management said that house price depreciation of 3% in the quarter was worse than the company expected. As of now, management expects that loan losses will average a higher-than-before 13 to 17 basis points in 2008 and go higher in 2009.

Fannie's underlying home price depreciation outlook for the nation is now 17% to 19% peak to trough, but there are other, tougher in-house scenarios than this base case. Alt-A loans are a big problem (second half 2005 to first quarter 2007), accounting for 11% of the single family book and 43% of loan losses. Michigan is 3% of the overall mortgage book and 23% of loan losses in the quarter. California is 15%, with 19% of the losses. Florida and California are 32% of the Alt-A book. Management feels that the Florida situation may be the worst. Florida delinquencies went to 232 basis points from 156 basis points in the fourth quarter. Management did say, and I agree, that the company's Alt-A experience will be better than the overall market, maybe 50% lower.

---

At the time of publication, Thomas had no positions in the stocks mentioned.