Fannie Mae loses $2.3B in quarter

WASHINGTON - Fannie Mae is making bold cutbacks that will send shock waves through the mortgage market, after posting a quarterly loss Friday that was three times larger than Wall Street expected.

To slow its financial decline, the mortgage finance giant slashed its dividend to 5 cents a share from 35 cents a share and said it will eliminate loans for borrowers with solid credit scores, but little proof of income or small or no down payments.

The company also is raising its mortgage fees, which will be passed onto borrowers as higher interest rates or closing costs.

With Fannie Mae and its sibling company Freddie Mac becoming more risk-averse, fears are building that mortgage rates will keep climbing, making it harder for people to afford a mortgage or refinance their home, and spur even more foreclosures.

'We are already in that spiral,' said Chris Mayer, real estate professor at Columbia Business School.

Volatility and disruptions in the capital markets worsened in July. And though Fannie Mae's losses should still peak this year, said Chief Executive Daniel Mudd, he couldn't predict how long the housing recession will last or how low prices will fall.

'The housing market has returned to Earth fast and hard,' Mudd said.

Disappointed stockholders sent Fannie Mae's shares down 9.1 percent, or 90 cents, to $9.05 Friday.

Investors continue to worry that Fannie and Freddie will be overwhelmed by losses and require government aid. Fannie Mae and Freddie Mac, are the biggest buyers of U.S. home loans from banks and other lenders. Together, they own or guarantee nearly half of outstanding U.S. mortgage debt.

Under the housing bill signed by President Bush last week, the government may boost lines of credit to the companies or buy their stock.

Mudd, however, said the company has no plans to use that financial lifeline. 'We're going to manage our way through it,' he said.

While Fannie and Freddie generally had higher standards for lenders than the subprime mortgage companies that started going belly-up at the end of 2006, the duo lowered their standards during the housing boom and bought securities linked to riskier loans.

Even as the subprime mortgage market collapsed, the industry - backed by Fannie and Freddie - kept making risky so-called Alt-A loans. They made up about 15 percent of all loans in the first half of 2007, up from 13 percent in all of 2006, according to trade publication Inside Mortgage Finance.