Bleakest market since the Great Depression

Fannie Mae (FNM.N) on Friday posted a much larger-than-expected second-quarter loss and slashed its dividend more than 85 percent to preserve capital as home loan defaults accelerated in the bleakest U.S. housing market since the Great Depression.

Fannie Mae Chief Executive Daniel Mudd told a conference call the company anticipates increasing its loss reserves.

"The housing crisis that we all observe as we drive home every single day continues to strain our results and our capital," he said.

By year's end, Fannie Mae will stop buying Alt-A mortgages, riskier mortgages that require less proof of borrower income. These loans made up about 11 percent of the company's total single-family mortgage credit business, but spurred about half of its credit losses in the second quarter.

Fannie said it has already reduced its holdings and purchases of Alt-A mortgages by 80 percent from peak levels. Far fewer such loans are being originated under tighter lending standards imposed as a result of the subprime lending crisis.

"With the slumping market, lenders are reevaluating borrowers' property values and risk profiles more frequently, triggering freeze notices for those with high loan-to-value ratios."

"During the first quarter of 2008, consumers fell behind on home equity credit lines at the fastest pace in two decades, according to the American Bankers Association."

"Morgan Stanley, the second-largest U.S. securities firm, is the latest to adopt the practice."

'"A segment of clients was recently notified of a change in the status of their home equity line of credit due to a change in the value of their property or their credit profile," Christy Pollak, spokeswoman for the New York-based lender, said Thursday."

"Washington Mutual, JPMorgan Chase and other big lenders have taken similar steps as home values continue to slide."

'"Lenders know real estate prices are dropping, and they're trying to mitigate their losses," said Dale DiGennaro, vice president of the California Association of Mortgage Brokers."

"So far, the trend hasn't spread to community-based banks and credit unions. "

'"We haven't taken that approach," said Anne Benjamin, vice president at Redwood Credit Union in Santa Rosa."

"The not-for-profit member cooperative, which has about 3,500 home equity lines outstanding, considers other kinds of security for its loans, she said."

"Santa Rosa's Exchange Bank also has avoided the practice, said spokeswoman Padi Selwyn. "We are not currently freezing home equity lines or loans," she said. "But we are reviewing the portfolio regularly."'

"Exchange Bank has more than 1,000 home equity lines outstanding."