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Subprime Turmoil Boosts GSE's Market Share

The turmoil in the subprime market has boosted Fannie Mae's share of the mortgage market to 38%, up from a 25% share in 2006, according to the mortgage company.

"We see opportunity ahead for both our business and for gaining market share," Fannie president and chief executive Daniel Mudd told investors and Wall Street analysts during a conference call last week.

But the CEO also cautioned that Fannie is not immune from the problems in the housing market and he expects to see higher credit losses going forward.

"We are the largest player in the mortgage market and as the market adjusts, I would expect we will take some lumps," he said in discussing the company's outlook and 2006 financial results.

Fannie economists expect the downturn in the housing market will lead to a 2% decline in house prices this year and a 4% decline next year nationwide as the inventory of unsold homes hits records levels. In addition, resets on subprime mortgages will continue into 2008 causing more foreclosures.

However, the Fannie Mae chief stressed that the company has rebuilt its accounting and internal controls and the remediation process from its accounting scandal is nearly complete.

"We are in a good position to navigate through a pretty challenging market and to manage this company through the bottom of the cycle," Mr. Mudd said.

The mortgage giant reported a $4.1 billion profit for 2006, down from $6.3 billion the prior year.

The company attributed the decline to a 41% drop in net interest income mainly due to the rising cost of financing its huge $700 billion investment portfolio.

But the company also reported a 22% drop in the profitability of its single-family business, despite an increase in revenue.

Fannie said net income on it single-family business totaled $2.04 billion after recording a $308 million increase in losses on guaranty contracts, a $533 million increase in administrative costs, a $123 million increase in loan-loss reserves and a $218 million increase in foreclosure expenses.

"We anticipate the losses we incur at inception of guaranty contracts will more than double in 2007 compared to 2006, primarily as a result of the decline in home prices as well as continued investment in loans that support the company's housing goals," the government-sponsored enterprise said.

During the conference call, chief financial officer Robert Blakely explained that the accounting standards on mortgage guaranty contracts often requires Fannie to record a negative fair value at the time of acquisition.

But even if a loss is recorded on the credit guarantee, "we still expect to make money on that guarantee," Mr. Blakely said.

Fannie issued $282.3 billion in mortgage-backed securities during the first six months of this year, compared to $232.3 billion in the first half of 2006. In the month of June alone, the GSE issued $53.1 billion in MBS.

Fannie executives expect the debacle in the subprime market will push more business their way, and allow it to set the standards for mortgage lending.

They noted that the Fannie guaranty fee is averaging close to 22 basis points. (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com/

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