Fannie Mae loses $2.2B in 1Q, warns of severe weakness

Home prices fell faster in the first quarter than Fannie Mae had expected, the government-sponsored company said, and it will open a $4 billion share offering immediately, with the remainder being offered in the "very near future."

Following the stock sale, Fannie Mae's federal regulator, the Office of Federal Housing Enterprise Oversight, will cut the capital surplus cushion the company has to maintain by 5 percentage points to 15 percent, with another five-point cut in September, provided there is "no material adverse change" in the company's regulatory compliance.

The company's estimated fair value of net assets as of March 31 was $12.2 billion, down 66 percent from $35.8 billion at the end of December.

Fannie Mae's first-quarter loss contrasts with a profit of $961 million in the January-March period last year. Fannie Mae reported on Tuesday that the early 2008 loss was equivalent to $2.57 a share. It earned 85 cents a share a year earlier.

Thomson Financial said Wall Street analysts had expected the company to lose 81 cents a share in the latest period. Washington-based Fannie Mae was forced to set aside $3.2 billion to account for bad loans.

Shares tumbled nearly 6.5 percent, or $1.83, to $26.46 in premarket trading.

Amid the deepening housing downturn and the financial turmoil it sparked, the government has increasingly looked to Fannie Mae and its smaller government-sponsored sibling, Freddie Mac, to step up their role and help restore stability to the market by buying up mortgages and bundling and selling them as securities. Three-quarters of mortgage-backed securities are issued by the two companies.

Earlier this year the regulators reduced by a third the mandatory cash cushion that must be held by Fannie and Freddie, in order to free up an additional $200 billion to finance new mortgages and help existing homeowners battered by the roiling market to refinance into more affordable mortgages.

But analysts worry that the opening for Fannie and Freddie could put too much financial risk on the backs of the companies, which have taken multibillion-dollar hits from the foreclosure wave and have been hungry for capital. Critics have said that allowing the companies to take on more debt could threaten the global financial system.