Fannie Mae admits it may need fresh capital

The possibility of a US government takeover of Fannie Mae, the mortgage finance giant, moved a step closer yesterday after the company said it may not have enough capital to make it through next year.

The company plunged to a larger-than-expected $2.3bn loss in the three months to the end of June, as American homeowners defaulted on their mortgages in record numbers.

Fannie and its fellow mortgage backer Freddie Mac together own or guarantee about half of all outstanding US mortgages, worth a total of $5.2 trillion, but a collapse in house prices has wiped billions from the value of the underlying collateral.

Fannie yesterday said it would open offices in Florida and California, two of the worst affected areas, because it had taken over so many foreclosed homes in these areas.

The company said it saw no let-up to the problems in the housing market and in the global credit markets, where it has a big portfolio of investments that have also declined in value. In fact, things had got worse in July, and the company said it would slash its dividend by 85 per cent to preserve cash.

"We have already undertaken a series of initiatives, including raising more than $7bn in additional capital in the second quarter, to help us manage through the most difficult US housing market in more than 70 years," said Daniel Mudd, Fannie's chief executive, but he added that there was considerable uncertainty about the outlook for 2009.

On some of its internal projections, Mr Mudd said, Fannie's capital cushion could be wiped out by additional losses in 2009. That would require it to raise additional funds. Fannie shares slipped 8 per cent in morning trading in New York as shareholders feared they could be wiped out by any rescue fundraising. The US Treasury has said it would do whatever it takes to ensure that Fannie and Freddie do not fail, including injecting taxpayers' money in return for new shares, which could give the federal government de facto control of the companies.