Fannie Shares Recover After Grim Results

Meanwhile, Bank of AmericaBAC, in a Securities and Exchange Commission filing last week, said it hadn't yet decided whether it will take on certain mortgage debt from Countrywide FinancialCFC when the bank completes its acquisition in the third quarter.

In this context, Fannie and Freddie are referred to by skeptics as a "trillion-dollar mortgage time bomb." An analysis by Standard & Poor's recently pointed out that at the end of January, 82% of all mortgages in the U.S. were backed by Fannie or Freddie, up from only 46% in the second quarter of 2007. Meanwhile, Fannie disclosed Tuesday that so-called Alt-A mortgage loans, which are characterized by a lack of credit documentation for the borrower, are an increasing source of financial stress for the company. The loans in question were made at the height of the housing bubble in 2005, 2006 and 2007.

The underwriting standards at the peak of the market were not what they should have been," said Thomas Lund, executive vice president at Fannie Mae, on a conference call with analysts. "That's where we are seeing the disproportionate share of our losses."

Lund also said credit losses were growing the Midwest due to a slowdown in the economy and mounting job losses.

"My guess is that will continue for some period of time," said Lund.

Fannie reported a loss for the quarter of $2.19 billion, or $2.57 a share, compared with the earnings of $961 million, or 85 cents a share, it recorded for the same period last year. Revenue climbed 28% to $3.78 billion.