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Fannie Mae Chief: No Recovery Until Late 2009?
By Ted Cornwell
Fannie Mae's chairman and CEO, Daniel Mudd, now believes housing markets will not begin to stabilize until the end of 2009.
That's a markedly more pessimistic outlook than most industry executives have expressed until recently. But Mr. Mudd joins a long list of housing finance executives who have come to believe that the downturn may be longer and more severe than they previously anticipated.
In a call with investors and analysts last Friday, Mr. Mudd said Fannie Mae anticipates that credit costs will rise as a result. Mr. Mudd said that Fannie Mae affirms its outlook for credit costs in the range of four to six basis points of its book of business this year, but he expects the credit loss ratio could rise to eight to 10 basis points next year. By contrast, the credit loss ratio was 1.8 basis points in 2006, which Fannie Mae executives described as historically low.
That outlook assumes a 4% decline nationally in home values, but it also assumes the economy does not suffer a recession.
As a result, Fannie Mae has raised its credit guarantee fee and taken additional steps to tighten underwriting, Mr. Mudd said. He said Fannie Mae is also changing guidelines to give mortgage servicers more flexibility and greater incentive to perform workouts on defaulted loans in a difficult market.
"We now believe that home prices won't begin to stabilize until the end of 2009," Mr. Mudd said. Fannie Mae predicts that home prices will fall 2% this year and 4% in 2008.
Despite higher guarantee fee income, Fannie Mae's results were negatively affected by $1.6 billion more in credit expenses related to higher foreclosures and charge-offs in the first nine months of this year. Mr. Mudd said those credit losses were concentrated in the Midwest, where weak job markets have exacerbated the problems associated with declining home values.
Michael Quinn, Fannie Mae's senior vice president for single-family credit risk management, said that loss severity has increased in the industrial Midwest due to accelerating home price declines.
"We expect losses from this area to be high for several more years," Mr. Quinn said during the call.
And in states such as Arizona, California, Florida and Nevada, a contraction in demand from investors and subprime borrowers is contributing to weakness in housing markets.
He said Fannie Mae expects delinquencies in Fannie Mae's book of business from California to "increase substantially in the coming months."
The rise in defaults has stretched the servicing industry's loss mitigation staffing, he said. Mr. Quinn said servicers are in a sprint to hire experienced default management employees who can conduct loan workouts.
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