Fannie Mae acknowledged that 2006 was a tough year for financial results on its 10-K-related conference call last Thursday, announcing that net income declined to $4.1 billion, compared with $6.3 billion in 2005.

Net interest income was also down to $4.8 billion as the average portfolio balance dropped 9% and the company had 46 basis points of net interest yield compression. Losses on guaranty contracts were $439 million in 2006 compared with $146 million in 2005, which was driven primarily by the slowdown in home price appreciation in 2006, leading Fannie Mae to increase its expectation of modeled credit losses on some of its guaranty pools, Fannie Mae said.

However, recent market waves seem to have turned the tide back to Fannie Mae in terms of market share, the company said. Its total book of business grew 7% to $2.5 trillion, and the loss of market share to private-label securities and other alternatives began to reverse, from 23.5% in 2005 to approximately 38% by July 2007. "We are seeing a huge restoration of share here as the market turns," said President and Chief Executive Officer Daniel Mudd on the call. "The market is returning to Fannie Mae's historical core with tighter underwriting and more rational pricing and more demand for the traditional fixed-rate products that we specialize in," Mudd said. However, he noted that the company is not immune to the stress in the housing market. Mudd expected the credit loss ratio to be in the range of four to six basis points. Futhermore, Mudd predicted that the housing market will be down 2% this year and about 4% in 2008.

(c) 2007 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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