E*Trade hit by Fannie-Freddie swoon

Insolvency fears swirling around Fannie Mae (FNM) and Freddie Mac (FRE) are hitting E*Trade (ETFC). The New York-based online broker posted its latest quarterly loss Tuesday, saying it swung to a second-quarter continuing operations loss of $119 million, or 24 cents a share, from the year-ago profit of $158 million, or 36 cents a share. The latest quarter was hit by a $319 million provision for loan losses, as loan delinquenices rose 9% and home equity delinquencies increased by 4% - though those rises were slower than in previous periods.

“Our retail franchise is performing well and delivering strong, competitive customer results despite a challenging macroeconomic environment,” said CEO Donald Layton.

E*Trade shares have been hammered over the past year as investors worried about rising losses on the mortgage-related holdings assembled by the previous management team led by Mitch Caplan. But running off those troubled portfolios are far from E*Trade’s only problem, as Tuesday’s release attests.

The company said its third quarter will be hit by losses on the sale of the company’s portfolio of Fannie Mae and Freddie Mac preferred stock. Since the second quarter closed on June 30, E*Trade notes, “these securities experienced record price declines and volatility,” amid fears that the government-sponsored mortgage companies would be nationalized. The unrest prompted E*Trade to sell most of the shares, at a pretax loss of $83 million. E*Trade says it held $150 million worth of the shares, at a loss of $40 million of market value, as of Monday, though it doesn’t expect to own them for long. “The company’s strong bias is to continue to reduce this remaining exposure,” E*Trade said, “as ownership of such securities is no longer in line with the company’s strategic objectives.”