Fannie Mae acknowledged that 2006 was a tough year for financial results on its 10-K-related conference call today, 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 on the conference call. 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 said 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 said that the company is not immune to the stress in the housing market. He 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.

Fannie Mae stressed that it is in a better position than many of the mortgage shops that are facing losses, particularly on lower-quality credit. "We believe that the Alt-A loans we guarantee have better-quality characteristics than the overall market of Alt-A," said Enrico Dallavecchia, executive vice president and chief risk officer. This included high FICO scores with a weighted average of 720 and with one percent less than 620. The company, which has purchased or guaranteed approximately $310 billion on Alt-A loans, or 12% of its single-family mortgage credit book of business, also has low exposure to Alt-A loans with high LTV ratios. Five percent of the agency's Alt-A loans have an original LTV ratio greater than 90%, and approximately 1.01% of its book is seriously delinquent, Fannie Mae said.

The company's subprime book, which is approximately $5.1 billion, or 0.2% of subprime mortgage loans or structured MBS backed by subprime mortgage loans as of June 30, 2007, has a weighted average FICO score of 626, with 46% below 620. The weighted average original LTV ratio is 79%, with eight percent over 90%. The company also noted that 60% of its subprime loans are fixed rate.

For its Alt-A and subprime portfolios, Dallavecchia described the company's use of stress testing for multiple levels of losses, including the potential for two consecutive years of 10% decline coupled with two consecutive years of a 2% increase in interest rates. The outcome of the  tests project very little loss in cash flow even under the "direst of scenarios," he said.

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