By AP Business Writer
updated 12/11/2007 6:00:19 PM ET 2007-12-11T23:00:19

The chief executives of Fannie Mae and Freddie Mac on Tuesday warned their ailing mortgage-finance companies will suffer further in 2008 due to a weakening housing market and rising home-loan defaults.

Freddie's CEO, Richard Syron, said the government-sponsored company could lose an additional $5.5 billion to $7.5 billion over the next few years from soured home loans.

"I honestly think it's going to get tougher before it gets better," Syron said in a discussion with financial analysts in New York. His company has already logged about $4.5 billion in projected losses during the first nine months of this year.

Freddie's shares fell $2.98, or 8.7 percent, to $32.06 in afternoon trading.

Fannie CEO Daniel Mudd, also meeting with analysts at the conference, forecast "a very tough 2008" and continued weakness in home prices through 2009. Mudd called the wave of defaults and foreclosures this year the worst mortgage crisis "in recent memory."

The Washington-based company, which lost $1.4 billion in the third quarter, sold $7 billion in preferred stock last week to raise capital to stabilize its finances. Mudd said Tuesday that Fannie had no further plans for such sales over the next year.

Mudd said the company could raise additional capital, however, through sales of mortgage investment holdings, increased fees on mortgages and other measures.

Syron said that while the mortgage crisis has brought a rising wave of foreclosure notices into public view, less evident have been "pictures of people standing with furniture on the lawn" after being forcibly evicted from their homes. "As that begins to happen, and it will happen, I am afraid of the impact that this has."

The chief executives' remarks came a day after Freddie and Fannie said they would change their criteria for purchasing delinquent home loans they've guaranteed, in order to reduce the number they buy from investors.

On Tuesday, McLean, Va.-based Freddie announced it was imposing a 0.25 percent fee on all new home loans it buys or guarantees with settlement dates starting March 9, matching an earlier move by Fannie. Both companies have begun adding surcharges on loans to borrowers with credit scores below 680 and who are borrowing more than 70 percent of the home's value.

A new plan orchestrated by the Bush administration to help distressed homeowners with a five-year freeze in mortgage rates, provides the relief only to borrowers with credit scores below 660.

Fannie and Freddie, which together own or guarantee around two-fifths of U.S. home-mortgage debt, have cut their dividends and sold billions of dollars of special stock recently to buttress their finances after posting stunning third-quarter losses. They have been forced to set aside billions of extra dollars to account for bad home loans, eroding their profits at a time when home prices are falling and defaults are spiking on high-risk mortgages made to borrowers with weak credit histories.

Shares of Fannie, the No. 1 financer and guarantor of U.S. home loans, declined $2.70, or 7.4 percent, to $34.21.

The two companies traditionally have been a major source of funding for the home-loan market by buying up mortgages made by banks and other lenders and then bundling them as securities for sale to investors. They have been under pressure to step up their role to help stabilize the mortgage market during the worst housing slump in more than 20 years.

Freddie lost $2 billion in the third quarter, and Syron said Tuesday that results aren't expected to be any better in the October-December quarter.

"We've reported really ugly numbers, let's face it," Syron said in the meeting with analysts.

Freddie late last month sold $6 billion of preferred stock in a special offering to raise capital and sliced its quarterly dividend in half, to 25 cents — its first dividend cut since it became a public company in 1989.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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