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	May. 6th, 2008 @ 06:18 pm

Fannie Mae Capital Rules Relaxed; Share Sale Planned (Update2)

By Dawn Kopecki

May 6 (Bloomberg) -- Fannie Mae's regulator will reduce restrictions on the largest financer of home loans, even after a wider-than-expected loss forced the company to raise capital and reduce its dividend.

Fannie Mae rose 8.9 percent after the Office of Federal Housing Enterprise Oversight said it will lower surplus capital requirements to 15 percent from 20 percent to allow the company to buy and guarantee more mortgages, its biggest source of profit. Washington-based Fannie Mae reported a $2.19 billion loss, cut the dividend for the second time in six months and said it plans to raise $6 billion to increase capital.

Ofheo is giving Fannie Mae and Freddie Mac more freedom to boost their mortgage portfolios and alleviate the worst housing slump since the Great Depression. The companies last quarter accounted for 81 percent of the home-loan market that other firms fled. The money raised will enable Fannie Mae to ``emerge from this crisis'' in a stronger position, Chief Executive Officer Daniel Mudd said.

``With a weak housing market, for God's sake, we need Fannie Mae and Freddie Mac to work,'' said Andrew Parmentier, a managing director at Friedman Billings Ramsey & Co. in Arlington, Virginia.

The first-quarter net loss was $2.57 a share, Fannie Mae said in a statement today. Analysts were anticipating a loss of 64 cents, the average of 12 estimates from a Bloomberg survey.

Losses to Increase

Credit and derivative losses rose fivefold to $8.9 billion, Fannie Mae said in a statement. The government-chartered company cut its dividend to 25 cents after lowering it to 35 cents from 50 cents last year. Fannie Mae will begin a $4 billion sale of common and convertible preferred shares today.

Fannie Mae told analysts to expect bigger credit losses in 2009 and said it sees U.S. home prices falling 7 percent to 9 percent this year, up from its previous estimate of 5 percent to 7 percent. Executives see U.S. home prices eventually tumbling by an average of as much as 19 percent before starting to recover.

``There are certain things that we can't control, like home prices and the overall condition of the economy, and until they improve, they will be a drag on our old book,'' Chief Business Operator Rob Levin told analysts during a conference call today.

Deteriorating Fast

``They are now starting to realize the fact that their credit losses will be considerably higher than they were in 2007,'' said Ajay Rajadhyaksha, head of fixed-income strategy for Barclays Capital, who is based in New York. ``Things in the housing and credit markets are deteriorating very fast.''

Ofheo lifted its consent order with Fannie Mae, imposed in 2006 after the company admitted to $6.3 billion in accounting errors. The regulator's willingness to free Fannie Mae from restrictions and allow it to buy more mortgages shows lawmakers aren't keeping up with the housing market slump, said Jim Vogel, head of agency debt research at FTN Financial Group in Memphis, Tennessee.

``Some of the things Fannie said today and experienced in the first quarter tells Washington they've fallen farther behind,'' Vogel said. ``The problems are outpacing Washington's programs.''

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