Fannie Mae hit by housing gloom

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US mortgage giant Fannie Mae has posted a $3.55bn (£1.8bn) loss for the three months to the end of December.

It blamed rising home loan defaults and set aside $2bn to cover further bad loans, warning the US housing slump could still get worse.

The quarterly loss cut into full-year earnings and the firm reported a loss for 2007 of $2.05bn, compared with a profit of $4bn for the year before.

It said it expects US house prices to fall between 5% and 7% in 2008.

We are working through the toughest housing and mortgage markets in a generation Fannie Mae boss Daniel H. Mudd

The forecast was lower than previous predictions of a 4% to 5% decline.

"We are working through the toughest housing and mortgage markets in a generation," said president and chief executive Daniel H Mudd.

"Our results for 2007 reflect the challenging conditions in the market we serve," he added.

Official data out this week shows new and existing home sales and prices plunged in January, while the time it will take to shift unsold homes rose to 10 months.

More difficulties

Fannie Mae is the largest buyer and guarantor of US mortgages, accounting for at least one in five home loans nationwide.

It has little exposure to sub-prime loans, those given to borrowers on patchy credit or on low incomes, which are at the root of the housing and subsequent credit crisis.

Thus its poor results - much worse than expected - show the problems are so deep that creditworthy house buyers are now struggling, analysts say.

Fannie Mae said it expected to lose money this year on eight to 10 of every 1,000 mortgages held in its $2.4 trillion mortgage portfolio.

The firm, together with Freddie Mac, were created by the US government to make it easier for more people to get on the housing ladder.

They were later privatised, but are still known as government-sponsored enterprises and are still able to borrow at a lower rate of interest, because bond markets believe that the US government would not allow them to go bankrupt.

Freddie Mac is due to report its results on Thursday.