NEW YORK (Reuters) - Fannie Mae said on Monday it is losing money so fast it may have to tap government cash to avoid shutting down after the largest source of funding for U.S. homes posted a record $29 billion quarterly loss.

The headquarters of mortgage lender Fannie Mae is shown in Washington September 8, 2008. REUTERS/Jason Reed

Fannie Mae, which along with rival Freddie Mac owns or guarantees about half of U.S. mortgages, reported its fifth consecutive quarterly loss. The government forced the two companies into conservatorship in September.

The Washington-based company warned that the worst housing crisis since the Great Depression could wipe out its net worth by year-end, forcing it to seek funding from the Treasury in order to avoid the government putting it into receivership and closing down.

The company’s loss stemmed largely from the write-down of the value of deferred tax breaks, which amounts to an admission it will continue to report losses.

Deferred tax assets can be used to offset future taxes, but only if the company can show it will return to profitability.

Credit expenses also soared to $9.2 billion in the quarter due to deteriorating mortgage credit conditions and as home prices declined, the company said in a statement. Fannie Mae also took big hits on exposure to other financial institutions, including $811 million in losses following the bankruptcy of Lehman Brothers Holdings Inc.

Fannie Mae’s loss was equivalent to $13 per share, compared with a loss of $1.4 billion, or $1.56 per share a year earlier. The company warned of a big loss for the fourth quarter if the current downward trends in U.S. housing and financial markets continue.

Further losses this quarter may wipe out shareholder equity, which fell to $9.3 billion in the third quarter from $44 billion at the end of 2007.

Negative shareholder equity would require Fannie Mae to tap a $100 billion capital backstop from the U.S. Treasury to help the company maintain operations that support the bulk of U.S. mortgages.

Formed as a government agency in 1938, the company is an important crutch to housing because it purchases of loans and securities, and stamps its guarantee on loans it pools into mortgage-backed securities.

The Treasury has already injected cash into other financial institutions, and on Monday boosted a bailout for American International Group Inc as the giant insurer reported a record $24.47 billion loss.

“It’s a glaring symptom of what we face in the financial markets,” said Andrew Harding, head of taxable bonds at Allegiant Asset Management in Cleveland, Ohio. “The Treasury has to finance this.”

Overall core business losses are “not so imposing” to traders and investors, who might have worried if the Treasury backstop was enough, said Jim Vogel, a strategist at FTN Financial Capital Markets in Memphis, Tennessee.

However, accepting capital from the Treasury under current terms could raise costs and make it harder for Fannie Mae to return to profitability, the company said in a filing with the Securities and Exchange Commission.

Equity investors, while nearly wiped out under the conservatorship, have been eager to see if the regulator will instruct the companies to sacrifice profit for bigger volumes in their mortgage guarantee and investment businesses.

Both have been given the room to expand portfolios by a combined $200 billion through 2009, but they have been slow to follow through as waning demand for their securities has inflated funding costs.

On top of restrictive debt costs, Fannie Mae said that it cannot issue securities in excess of 110 percent of its total indebtedness as of June 30, based on the Treasury’s senior preferred stock purchase plan negotiated in September.

That “likely will prohibit us from increasing the size of our mortgage portfolio to $850 billion, unless Treasury elects to amend or waive this limitation,” Fannie Mae said in its filing. The portfolio was $761 billion in September.

Fannie Mae said it was just $12 billion under its estimated debt limit as of October 31.

Provisions for loan losses and other charges more than offset a 53 percent rise in revenue to more than $4 billion in the third quarter from a year earlier, as lower short-term borrowing rates boosted interest income from the portfolio.

Shares of Fannie Mae were little changed near 73 cents in early afternoon in New York. Yield spread premiums on Fannie Mae five-year notes used to fund the portfolio narrowed about 0.05 percentage point to 1.115 percentage point.

“They have to tap into Treasury funding,” Harding said. “Fannie Mae is mandated to buy mortgage-backed securities. How are they going to do that if they have a negative net worth?”