Fannie Shares Recover After Grim Results

The bottom-line results missed expectations on Wall Street by a long shot, with analysts expecting a loss of 81 cents a share, according to consensus estimates reported by Thomson Reuters. Top-line results, however, beat expectations, with analysts, on average, forecasting revenue of $1.26 billion for the quarter.

The results included $4.4 billion in losses on mortgage-related securities and $3.2 billion in credit-related expenses due to higher charge-offs amid higher defaults and average loan-loss severities.

The company said it expects "severe weakness in the housing market to continue in 2008," and that will "lead to increased delinquencies, defaults and foreclosures on mortgage loans, and slower growth in U.S. residential mortgage debt outstanding."

To cope with its predicament, Fannie said it will cut its common stock dividend to 25 cents a share from 35 cents a share, starting in the third quarter. That will free up an estimated $390 million a year.

Despite all the disappointments, Mudd said on the conference call that he sees "terrific opportunities" for Fannie going forward as the company is asked to play a larger role in the mortgage market.

"As the market recovers, we will be a prime beneficiary," said Mudd.

Peter Schiff, a longtime housing skeptic who heads Darien, Conn.-based broker-dealer Euro Pacific Capital, says that Fannie will be able to raise fresh capital because of its implied backing by the federal government, but he thinks the company will eventually need to be bailed out by the government, requiring large amounts of currency inflation from the Fed or taxpayer dollars.