Nov. 9 (Bloomberg) -- Fannie Mae, the biggest source of money for U.S. home loans, said its third-quarter loss more than doubled to $1.39 billion as a deepening housing slump increased mortgage delinquencies.

The net loss was caused by a $2.24 billion decline in the value of derivative contracts and $1.2 billion in credit losses among the $2.7 trillion of mortgage assets Fannie Mae owns or guarantees, the Washington-based company said today in a U.S. Securities and Exchange Commission filing.

Chief Executive Officer Daniel Mudd said the housing market will worsen, with the average price of homes falling 2 percent this year and 4 percent in 2008. The government-chartered company joins Citigroup Inc., Washington Mutual Inc. and Countrywide Financial Corp. in reporting losses on mortgages as foreclosures last quarter doubled to a record, according to RealtyTrac Inc.

``Fannie Mae is becoming another poster child for the problem you see with Countrywide Financial, Washington Mutual and any of the firms with a good chunk of mortgage business,'' said Michael Mullaney, who manages $10 billion at Fiduciary Trust Co. in Boston. ``You just don't know anymore where you're going to get a negative surprise that comes out of the woodwork.''

The loan loss ratio could at least double to 8 to 10 basis points next year, Mudd said on a conference call with analysts. The ratio was 4 basis points for the nine months ended Sept. 30, and 1.8 basis points in the year-ago period, the filing shows.

Fannie Mae fell 80 cents, or 1.6 percent, to $49 at the close of regular New York Stock Exchange composite trading.

``Today's report did nothing to buoy market sentiment in general,'' said Jim Vogel, head of agency debt research at FTN Financial in Memphis, Tennessee. Vogel said the third-quarter loss was wider than he anticipated.

Cuomo Investigation

Fannie Mae, which owns or guarantees about 20 percent of the home mortgage market, also gave results for the first and second quarters, bringing it up to date on its earnings reports. A return to regular filing is a step toward shedding restrictions imposed by the Office of Federal Housing Enterprise Oversight after the company began revealing $6.3 billion of accounting misstatements.

Fannie Mae is also facing new scrutiny over the possibility that mortgages it bought may have been tainted by inflated home appraisals. New York Attorney General Andrew Cuomo said Nov. 7 he subpoenaed Fannie Mae and Freddie Mac as part of a probe into ``widespread'' collusion between lenders and property appraisers.

Congress created Fannie Mae to expand home ownership. The company, which increases mortgage financing by buying loans from lenders, profits by holding mortgages and mortgage bonds as investments and by charging a fee to guarantee and package loans as securities. It sees losses when defaults and foreclosures rise.

``We have already begun tightening our underwriting and pricing,'' including requiring higher down payments, more documentation and higher credit scores, Mudd said on the call.

Getting Worse

Net income for the first three quarters of 2007 dropped 57 percent to $1.5 billion, or $1.17 a share, from $3.5 billion, or $3.16, a year earlier, the company said.

Credit-related losses in that period surged by $1.6 billion to $2 billion, while losses on securities guaranteed by Fannie Mae rose $857 million to $1 billion, the company said. Both setbacks stem ``from home price weakness and credit market disruption.''

Fannie Mae ``is not immune to the challenges facing the mortgage markets,'' Mudd said. The third quarter net loss amounted to $1.56 a share, and compares with a net loss in the year-ago period of $629 million, or 79 cents a share, the company said.

Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates. Fannie Mae and other companies use derivatives to hedge against losses on assets and investments including home loans and mortgage bonds.

New Business

Home foreclosures doubled in September from a year earlier as subprime borrowers struggled to make payments on adjustable-rate loans, according to RealtyTrac. Foreclosures are plunging the housing industry deeper into recession by pushing more homes onto a market where sales and prices are dropping. There's a 10-month supply of unsold homes, the highest in at least eight years.

The company said the estimated fair value of its net assets, a measure of its worth tracked by analysts and investors, fell to $34.2 billion, a drop of $8.7 billion from the start of the year.

Fannie Mae's mortgage credit book of business grew 10 percent in the first nine months to $2.8 trillion, the company said. Its share of the market in mortgage bonds rose to 41.2 percent from 24.3 percent in the same period in 2006.

``Fannie Mae is getting a lot more loans that meet their credit standards but are at the low end of their range,'' said Gary Gordon, an analyst at Portales Partners in New York. ``So they will see rising credit losses at least until 2010.''

Market Overreaction

There is an ``enormous overreaction'' by investors in Fannie Mae, Freddie Mac and banking stocks, said David Dreman, who oversees $22 billion including Fannie Mae shares as chairman of Jersey City, New Jersey-based Dreman Value Management LLC.

With Fannie Mae ``buying mortgages at a good price and a major discount, their earnings growth in a few years could'' rise beyond 10 percent and into the teens, Dreman said.

``Market conditions are also creating opportunities for us,'' Mudd said on the call. He later added that ``When the cycle turns we are going to be in a stronger and stronger position.''

Easing Portfolio Limits

Mudd, a former Marine, took over as CEO after the board ousted Franklin Raines and other executives in December 2004 because of what would prove to be $6.3 billion in profit overstatements. Mudd has been correcting flaws in accounting and internal controls, and working with Congress and regulators to improve oversight.

Fannie Mae said now that it has restored regular reporting, it plans to talk with Ofheo about the portfolio limits agreed to last year as part of a settlement over the accounting errors. The restrictions are hindering Fannie Mae's ability to fully support the market, as its federal mission requires, the company said.

``Becoming a current SEC filer again eliminates the remaining arguments of'' Fannie Mae's regulator for insisting the company continue to curb growth and set aside 30 percent more capital than the usual minimum, David Hochstim, a Bear Stearns & Co. analyst, said in a Nov. 6 report to clients.

Policy makers may allow Fannie Mae to increase its efforts to stabilize mortgage finance, Mudd said. ``There is developing an increasing consensus'' on how Fannie Mae and other government- sponsored enterprises may help speed a revival, he said.

To contact the reporters on this story: James Tyson in Washington at at jtyson@bloomberg.net.

Last Updated: November 9, 2007 17:02 EST