Fannie Mae's top priority is capital cushion: CEO

NEW YORK (Reuters) - Fannie Mae (FNM.N), the largest provider of funding for U.S. home loans, is making capital preservation its top priority to protect itself from the housing slump, Chief Executive Officer Daniel Mudd said on Wednesday.

Fannie Mae's "number one priority is capital," he said. "We want to stay long capital" through a difficult 2008 and into 2009, which "we do not think will be rosy."

The company in the last quarter increased the amount of capital over what is required to $3.9 billion from $2.3 billion at the end of September, it said in a statement. More capital is needed for the company to operate through a tough year, Mudd said on a conference call.

The Washington-based company earlier reported a larger-than-expected fourth quarter loss of $3.6 billion. It increased credit loss expectations to a range of 11 to 15 basis points from the 8 to 10 basis points forecast in November, and boosted its prediction for home price declines in 2008.

"We've moved the dials somewhat to the more negative side," Mudd said. Fannie Mae is "accordingly, taking on a more conservative capital stance."

Fannie Mae needs capital to cushion against losses and also to support growth in its investment portfolio and guarantees on mortgage-backed securities it issues. Lenders have increased their reliance on MBS programs of Fannie Mae and rival Freddie Mac over the past year as other sources of funding, such as Wall Street bond programs, have shriveled.

Fannie Mae's share of the mortgage bond market climbed to 49 percent last quarter, nearly double that of a year earlier, Mudd said.

(Reporting by Al Yoon, Editing by Chizu Nomiyama)