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Fannie Mae Back from the Ashes

Adam Rust's picture

Posted May 16, 2013

Fannie Mae is back from the dead, having reported that its quarter-2013-over-quarter-2012 net income tripled.  When coupled with a large gain from a positive development on future tax

liabilities, the company's earnings rose to almost $60 billion.

For some time, FNMA shares have been treading at 80 cents per share. Last Friday, they closed at 88 cents. Yesterday, their shares broke $1.40.

Why are things suddenly so rosy?

a) Some hedge funds think that the return to profitability of the GSEs opens up the chance the companies will be privatized.

b) Bank of America paid the company for bad loans, purchased back another set of loans, and paid an additional penalty related to mortgage insurance.

  • paid $3.6 billion as compensation for repurchase requests
  • Bought back 29,500 loans for $6.6 billion in January.
  • Made an initial payment of $518 million for mortgage insurance claims.

c) The company says that the value of its future tax assets increased substantially. The company said that a change in how it sets aside for future taxes allowed it to claim another $50 billion in income.

d) Credit quality has improved, partially due to the process of shifting its book of business into newer loans. Over the last five years, Fannie has purchased 10.6 million refinance and 2.9 million home purchase loans. Loans from that period, during which credit standards at the GSEs tightened up considerably, now constitute 69 percent of its portfolio.

In 2013, the average credit score among its SFR portfolio was 757 and median LTV was just 75 percent. While those seem like high standards, they are in fact the lowest and highest, respectively, since 2009. In 2009, average LTV was just 67 percent.

In the first quarter of this year, 3 percent of loans were delinquent. In 2010, 5.47 percent were delinquent during the same season.

e) They are not making as many loan modifications: In 2010, Fannie agreed to modify 403,536 loans. In 2012, the GSE changed the terms of 163,412 loans. They are on a similar pace this year.

As a result, Fannie says it will pay $59 billion in dividends in the second quarter of 2013. To give a sense of the scale of that impending action, to date Fannie has paid approximately $36 billion in dividends.