More big losses expected from Fannie, Freddie

By Lynn Adler

NEW YORK (Reuters) - Fannie Mae and Freddie Mac will likely post steep first-quarter losses due to the U.S. housing market slump, although the two largest home-funding companies will likely avoid a repeat of record losses.

Sliding house prices and rising foreclosures among even the high-quality loans that comprise the bulk of business at the two federally chartered companies have eroded their income.

While the losses were likely tempered after the two raised their fees and as the credit crunch drove many of their rivals to the sidelines, they are still expected to need to raise significant additional capital.

"It's probably the most challenging environment that they've seen in their histories," said Moshe Orenbuch, equity research managing director at Credit Suisse in New York, who assigns an "underperform" rating to both companies.

The Standard & Poor's/Case-Shiller home price index of 20 metro areas fell 2.6 percent in February, for an annual drop of 12.7 percent. Foreclosure filings surged 23 percent in the first quarter, and were more than double a year earlier, according to RealtyTrac.

Rising delinquencies and foreclosures have forced both companies to write down the value of mortgage assets they own and boost reserves to cover payment guarantees on bonds held by investors.

Fannie Mae, whose shares have tumbled more than 50 percent over the last 12 months, will be first out of the chute when it reports first-quarter results on Tuesday. Freddie Mac, whose shares have fallen nearly 60 percent over the same period, is scheduled to post its results on May 14.

Wall Street analysts see Fannie Mae reporting a $2.02 billion loss, $1.48 per share, according to Reuters Estimates.