Federal National Mortgage Association Preferred Securities
Long before May 2008, there was substantial adverse information in the market place regarding the troubles at the Federal National Mortgage Association.
In September 2004, the Office of Federal Housing Enterprise Oversight ("OFHEO") announced that the Federal National Mortgage Association ("Fannie Mae") was under investigation for engaging in deceptive accounting practices. Subsequently, in December 2004, Fannie Mae announced a $6.3 billion restatement of its earnings, the largest restatement in American history, and in May 2006, announced a $400 million settlement with securities regulators and the OFHEO for violating certain accounting standards.
In the early Spring of 2007, the subprime mortgage industry, and the value of certain securities with exposure to the mortgage industry also collapsed. Fannie Mae was not immune from this collapse. In November 2007, Fannie Mae announced a reported a $900 million loss, and a $8.7 billion decline in the value of its assets, the period ended September 30, 2007. In November 2007, Fannie Mae also reported $56.2 billion in exposure in subprime and Alt-A loans as of period ended September 30, 2007.
In a November 9, 2007 conference call with securities analysts, Fannie Mae President and Chief Operating Officer, Daniel H. Mudd, told investors that the Company had approximately $3 trillion dollars at risk in residential home mortgages, but that the Company only had reserves of approximately $41 billion.
As a result, on December 4, 2007, Fannie Mae announced that the Company would reduce its dividend, and in February 2008, the Company, citing continued deterioration in the housing market and an increase in its credit loss experience, reported a $7.1 billion decline in the value of its assets and a net loss of $2.1 billion.
On March 10, 2008, Barrons’ Cover Story, was "Is Fannie Mae The Next Government Bailout?" ("The mortgage giant’s house isn’t well protected against a stormier credit market. If its roof caves in and a bailout is needed, shareholders, could get buried.").
Following the Barrons’ story, shares of both common and preferred Fannie Mae fell precipitously, as it was widely believed that the company was insolvent.
In April 2008, Merrill Lynch’s own analysts reported that regulators required Fannie Mae to raise an additional $20 billion in capital to remain solvent, and on May 6, 2008, following the announcement that FannieMae planned to raise $6 billion through the offering of the Series T, 8.25% Non-Cumulative Preferred Shares, The Business Wire announced that Fitch Ratings placed these shares on a ratings "negative watch," based upon the company’s net loss of $2.2 billion for the quarter ended March 31, 2008, and continued expected "severe weakness in the housing market and expected increases in credit losses." (Exhibit "J").
Even a cursory reading of the "Risk Factors" disclosed in the Fannie Mae Preferred Prospectus reveals the risk associated with these securities:
We have experienced increased mortgage loan delinquencies and credit losses, which had a material adverse effect on our earnings, financial condition and capital position in 2007 and the first quarter of 2008.
Increased delinquencies and credit losses relating to the mortgage assets that we own or that back our guaranteed Fannie Mae MRS continue to adversely affect our earnings, financial condition and
capital position. We are exposed to credit risk relating to both the mortgage assets that we hold in our investment portfolio and the mortgage assets that back our guaranteed Fannie Mae MBS. Borrowers of mortgage loans that we own or that back our guaranteed Fannie Mae MBS may fail to make required payments of principal and interest on those loans, exposing us to the risk of credit losses.
Federal National Mortgage Association Prospectus, May 13, 2008.
In May 13, 2008, Wall Street raised $2 billion through the sale of the Fannie Mae Series T Preferred Shares.
In July 2008, several investment analysts reported that Fannie Mae would require an additional $46 billion in capital, following a report by the Federal Reserve that suggested that the company was insolvent.
On September 7, 2008, federal regulators seized control of Fannie Mae.
If you have suffered losses a the result of the recommendation of Fannie Mae Preferred shares by your stockbroker or investment professional and were unaware of the risk associated with these securities, you should consult with an attorney to determine whether your losses may be recoverable through FINRA securities arbitration.
