Fannie Mae Chief Executive Daniel Mudd said Thursday the housing slump will last beyond next year, dragging down home prices and increasing...

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Fannie Mae Chief Executive Daniel Mudd said Thursday the housing slump will last beyond next year, dragging down home prices and increasing credit losses.

“We don’t think we hit a bottom until the end of ’08 and then we have some period of time to work our way back up again,” Mudd said in an interview in Washington, D.C.

The outlook from Fannie Mae, the largest source of money for U.S. home loans, is more bearish than that of the National Association of Realtors, which this month predicted new-home sales will stop falling in the first quarter of 2008.

Pessimism about the housing market is growing as prices fall and demand declines.

Purchases of new homes in the U.S. dropped more than forecast in August and prices plunged by the most in almost four decades, the Commerce Department said Thursday.

U.S. home prices will fall 2 to 4 percent this year and “more next year,” Mudd said.

Mudd is right to be concerned, said Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tenn.

The prediction “isn’t too negative at all,” Vogel said. “The infrastructure damage to mortgage finance this year has been breathtaking.”

Congress created Fannie Mae and Freddie Mac, the second-largest U.S. financer of home loans, to expand homeownership and promote mortgage-market stability.

The companies, which increase mortgage financing by buying home loans from lenders, own or guarantee about 40 percent of the $11.5 trillion U.S. home loan market.

The slump and record foreclosure rates will increase credit losses at Fannie Mae, Mudd said.

The company had about 25,125 foreclosed properties on its books at the end of last year.

Home purchases declined 8.3 percent to an annual pace of 795,000, the lowest level in more than seven years, from a revised 867,000 rate in July, the Commerce Department said.

The median price dropped 7.5 percent from August 2006, the most since 1970.

Fannie Mae may meet all the requirements for a release of regulatory constraints on growth and reserve capital by filing timely results in February, Mudd said.

The Office of Federal Housing Enterprise Oversight (OFHEO) imposed the restrictions after disclosures in 2004 that the company had overstated earnings by $6.3 billion.

OFHEO has said it won’t lift constraints on Fannie Mae and Freddie Mac until they file regular financial reports.

OFHEO raised a limit on the mortgage assets of Fannie Mae and Freddie Mac on Sept. 19 to $735 billion for the third quarter and granted a 2 percent increase in the assets over the next year.

“Many safety and soundness issues are not yet resolved” at the two government-chartered companies, OFHEO said.

Mudd sought an increase in the cap to 10 percent.

“Let’s loosen this up a little bit and give us a chance to respond in a market where all the other investors have gone away,” Mudd said.

Legislation that passed the House in May, creating a stronger regulator for Fannie Mae and Freddie Mac, “is a pretty good bill” that “needs some clarifications and some improvements,” Mudd said.

The bill would give a new regulator more authority to alter capital-reserve requirements.

The Senate hasn’t yet considered such a measure this year.

Bloomberg News reporter Jody Shenn contributed to this report.