The nation’s largest mortgage lender has suffered a setback in the financial markets. Fannie Mae recently experienced its largest two-day share-price drop in two decades.
The stock market plunge came amidst news that the lending giant might have understated its credit losses. Shares of Fannie Mae declined 5.5% to $40.69 one day and dropped 17% the following week.
Fannie Mae owns or backs about 20% of the U.S. home loan market, which has been rocked by a slew of foreclosures and defaults in recent months. The way that Fannie Mae works is this: the company purchases mortgages from other lenders and then charges a fee to reinvent the loans as securities. When defaults and foreclosures increase, Fannie Mae and the smaller Freddie Mac experience losses since some of the loans are considered investments.
Recently, Fannie Mae reported a loss during the third quarter of nearly $1.4 billion. That included more than $650 million in “unrealized losses” which were blamed on decreases in the market value of its loan portfolio.
Fannie Mae’s chief financial officer has contended that the organization’s new approach to spotlighting realized losses was accurate. But other financial experts are questioning Fannie Mae’s methods. As a result, the financial markets remain skittish about the lending powerhouse.
This is certainly not the first time that Fannie Mae has encountered controversy over its accounting methods. In the year 2004, regulators discovered the lender overstated profits during the period from 2001 to 2004. As a result, the price of shares of Fannie Mae stock dropped substantially.
Now, shares of Fannie Mae have dropped to their lowest point in more than 10 years.
Meanwhile, observers fear that the problems within the housing market could lead to an all-out recession. House prices have plummeted, and prospective home buyers are finding it increasingly difficult to secure loans. Experts predict the housing market won’t recover until the middle of 2008.
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