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Tags: fannie | mae | treasury | debt

Fannie Mae Stops Racking Up Debt at US Treasury

Thursday, 10 May 2012 05:00 PM

For the first time since Fannie Mae was seized by the U.S. government in 2008, it is performing well enough to stop adding to the debt it owes taxpayers, a milestone in the history of a company that was pushed to the brink of collapse by investments in subprime loans.

The Washington-based mortgage financier Wednesday reported a profit of $2.7 billion in the first quarter even after making a dividend payment of $2.8 billion on its debt to the Treasury, leading officials to declare a turning point for the company. In the few previous quarters when Fannie Mae and its smaller cousin, Freddie Mac, have posted operating profits during the past four years, the dividend payments have forced them to seek more aid from Treasury to balance their books.

“We expect our financial results for 2012 to be significantly better than 2011,” said Susan McFarland, Fannie Mae executive vice president and chief financial officer. “Our credit performance is headed in the right direction.”

Fannie Mae and Freddie Mac together have taken almost $190 billion in U.S. aid since they went into conservatorship and their footprint has expanded to the point that they own or guarantee more than half of U.S. home loans, leading many Republicans to call for them to be wound down. A change in the fortunes of the two so-called government-sponsored enterprises could reduce political pressure for the administration of President Barack Obama to produce a plan for dismantling them and reducing the government’s role in housing finance.

“From where we were in the depths of the crisis, this is a pretty remarkable transition,” said Isaac Boltansky, Washington policy analyst at Compass Point Research and Trading LLC. “It really gives the Obama administration some breathing room on GSE reform.”

Loan Quality

Fannie Mae has finally put aside enough reserves to cover expected losses on faulty loans and the quality of the new loans it is backing is beginning to “shine through,” McFarland said in a telephone interview.

Fannie Mae decreased loss reserves to $74.6 billion as of March 31 from $76.9 billion three months earlier. The company reported a $16.9 billion net loss for the full year of 2011.

“This quarter shows the earnings potential of this company and our ability to pay taxpayers back over time,” McFarland said.

Fannie Mae’s news came amid other positive indicators for housing yesterday. CoreLogic Inc. reported that the serious delinquency rate, representing borrowers more than 90 days late on payments, fell in March to 7 percent, the lowest since July 2009. Prices for single-family homes climbed in half of U.S. cities during the first quarter, the National Association of Realtors said.

Freddie Mac Profit

Freddie Mac last week reported a profit of $577 million and took an additional $19 million in Treasury aid after paying its dividend.

Still, some analysts cautioned against reading too much into one quarter of profitable results.

“I’d be a little cautious about reading into it their having turned the corner completely,” said Clifford Rossi, a University of Maryland professor and former managing director of Citigroup Inc.’s consumer lending group. “It certainly looks good and promising for their ongoing performance, but they are nowhere near out of the woods.”

Lawrence White, an economics professor at New York University’s Stern School of Business, said it may be a long time before the two companies, which are now essentially paying interest to Treasury, can significantly reduce their debt.

“In terms of actually diminishing the Treasury’s capital contribution, there’s a long way to go on that,” he said.

Crisis Fallout

Meanwhile, the fallout from the mortgage crisis is still playing out on the company’s books. Fannie Mae is continuing to battle with lenders, particularly Bank of America Corp., over refunds for faulty mortgages. The company said its pending requests to lenders for refunds rose about 17 percent in the first quarter to $12.1 billion from $10.4 billion at the end of 2011.

As of March 31, Charlotte, North Carolina-based Bank of America accounted for almost 60 percent of Fannie Mae’s loan repurchase requests and more than 70 percent of those outstanding for more than three months.

The Obama administration released a white paper last year exploring different options for keeping, abolishing, or reconfiguring government backing for mortgage finance. Treasury Secretary Timothy F. Geithner has said the administration expects to release more details of a plan for housing finance reform this year.

Legislation Awaited

If Congress doesn’t move forward with legislation, a continued turnaround at the government-sponsored enterprises could raise the question of whether a plan to dismantle them is needed, said Tim Rood, managing director of the Collingwood Group, a Washington-based consulting firm.

“I have little doubt that a few quarters of profitability will test the convictions of the administration on GSE reform,” Rood said. “Frankly, raising their capital requirements and eliminating their investment portfolios will largely fix the issues that brought down the organizations.”

Even if the companies’ balance sheets improve, Republican lawmakers are unlikely to change their minds, said Representative Scott Garrett, a New Jersey Republican and chairman of the capital markets panel of the House Financial Services Committee.

No Celebration Yet

“Not to be the skunk at the party, but I don’t think we should be celebrating the fact that Fannie has finally posted a profit after spending the last four years in conservatorship,” Garrett said in an e-mailed statement. “The real celebration will come after we dismantle the GSEs and end the ongoing taxpayer bailout to keep them afloat.”

In its quarterly filing with the Securities and Exchange Commission Wednesday, Fannie Mae cautioned investors that its future is unclear.

“There continues to be uncertainty regarding the future of our company, including how long the company will continue to exist in its current form, the extent of our role in the market, what form we will have, and what ownership interest, if any, or current common and preferred stockholders will hold in us after the conservatorship is terminated,” the filing said.

© Copyright 2022 Bloomberg News. All rights reserved.

Thursday, 10 May 2012 05:00 PM
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