5/08/2014 @ 9:54AM 5,360 views

Fannie Mae And Freddie Mac Sending Treasury $10.2 Billion After Posting First Quarter Profits



Despite home prices that grew at a meager 0.4% rate during the first quarter of 2014, government-backed mortgage finance companies Fannie Mae andFreddie Mac were able to turn a profit during the quarter, albeit smaller profits than what they earned during the same time in 2013, the companies reported Thursday morning. And according to the terms set when the government bailed the mortgage siblings out of trouble in 2008, these profits are going straight into the hands of the U.S. Treasury.

Fannie Mae posted $5.3 billion in net income for the first quarter of 2014 and comprehensive income of $5.7 billion, the company’s ninth consecutive quarterly profit though a notable downturn from the $58.7 billion reported as net income in the year-ago period. The difference is largely attributable to a one-time accounting move that allowed Fannie Mae to apply losses from delinquent mortgages, though Fannie Mae CEO Tim Mayopoulos said in a Thursday morning conference call that the first quarter’s results were pressured by home prices.

“We’re operating in a different market with different business originations. Home prices only increased moderately. You’ll recall we saw a very signification increase in home prices in 2013,” he said, comparing the 8.5% growth in home prices that occurred in 2013 to the 0.4% uptick that occurred during the first quarter of 2014. “We also had smaller acquisition volume than we experienced during much of 2013. All of this tells us that we’re moving rapidly to a purchase money market after many years of refinance driven market.”

Fannie Mae (and sibling Freddie Mac) has operated under the conservatorship of the Federal Housing Finance Agency (FHFA) since September 6, 2008, and as such will pay the U.S. Treasury the entirety of its $5.7 billion comprehensive income. The payment will be made via dividends in June and will bring Fannie’s payback total to $126.8 billion, a figure that surpasses its $116.1 billion drawdown requests. Fannie’s agreement with Uncle Sam also contains a stipulation that does not permit it to build a capital reserve, and Mayopoulos noted that his company’s existing $2.4 billion capital reserve will be reduced by $600 million each year until it reaches zero.

This, however, leaves the company with very little room for operating error.

“The tax payer remains in first-loss position,” he said. “As a result, we are faced with running this business with really no cushion. It is a challenging situation for us, and we try to manage our business as effectively as possible. But we do remain exposed to external events – home prices, interest rates, etc.”

Despite these pressures — and Mayopoulos stressed that he does not expect home prices to decline, but rather, to appreciate at a lower rate than they did in 2013 — Fannie Mae said it expects to remain profitable for “the foreseeable future.”

Freddie Mac, meanwhile, reported $4 billion in net income, down $4.6 billion from the prior-year period thanks to derivative losses and lower legal settlement proceeds. The company’s comprehensive income came in at $4.5 billion, and like Fannie Mae, that figure is heading straight into the hands of Uncle Sam. After this dividend is paid in June, Freddie Mac will have repaid the Treasury a total of $86.3 billion, a sum that’s nearly $15 billion higher than the $71.3 billion it borrowed.

Like Fannie Mae, Freddie Mac cited pressure from plateauing home prices, which in previous quarters grew at a faster rate and helped boost its bottom line; unlike its sister organization, Freddie’s outlook for future earnings growth was less optimistic. “The level of earnings Freddie Mac has experienced in recent periods is not sustainable over the long term,” the company stated Thursday. “In addition, declines in the size of the company’s mortgage-related investments portfolio, as required by FHFA and the Purchase Agreement with Treasury, will reduce earnings over time. The company’s financial results will also continue to be affected by changes in interest rates, the yield curve, and mortgage spreads, which can cause significant earnings and net worth variability from period to period.”

Fannie Mae and Freddie Mac trade on over-the-counter markets under the ticker FNMA, and their results were solid enough that shares of that entity opened higher Thursday and are currently trading for a 2.2% gain.
Related from Forbes:

17 Banks Being Sued By The FHFA Over Shoddy Mortgages

1 of 18
AP
17 Banks Being Sued By The FHFA

The Federal Housing Finance Agency filed suit against 17 U.S. and overseas banks Friday related to nearly $200 billion in mortgage-backed securities sold to Fannie Mae and Freddie Mac during the years preceding the financial crisis. These are the banks being sued.


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