Mortgage giant Fannie Mae has posted a $3.55 billion loss for the last quarter of 2007, blaming rising home loan defaults. It set aside $2 billion to cover other bad loans and warned the U.S. housing slump could get worse.

"We are working through the toughest housing and mortgage markets in a generation," said president and CEO Daniel Mudd. "Our results for 2007 reflect the challenging conditions in the market we serve."

New data out this week shows new and existing home sales and prices have plunged in January.

Fannie Mae said it expects to lose money this year on eight to 10 out of every 1,000 mortgages held in its $2.4 trillion mortgage portfolio.

Freddie Mac posted a loss of $2.5 billion.

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