Credit Loss Reserves and Foreclosed Inventory Expenses Eat at Fannie Mae's Earnings

Fannie Mae has reported First Quarter 2010 Earnings Results.

The government-sponsored enterprise, which has been operating under government conservatorship since September 7, 2008, lost $11.5 billion in the first quarter compared with a net loss of $15.2 billion in the fourth quarter of 2009. Fannie Mae paid $1.5 billion to the Treasury Department during the quarter in the form of dividends on senior preferred stock held by the U.S. government. 

The loss attributable to common stockholders was $13.1 billion or ($2.29) per diluted share.  The shareholder loss in the fourth quarter of last year was $16.3 billion or ($2.87) per diluted share.

Net revenues in the current statement were $3 billion compared to $5.8 billion in Quarter Four and $5.2 billion during the same period one year ago.  Net interest income was $2.8 billion compared to $3.7 billion last quarter and $3.3 billion a year ago; and guarantee income was $54 million compared to $1.9 billion and $1.8 billion respectively.

Fannie Mae said that its first-quarter results were driven primarily by credit-related expenses, which are total provisions for credit losses and foreclosed property expenses. Credit related losses for the quarter were $11.88 billion compared to $11.92 billion in the fourth quarter of 2009.  The losses, however, were substantially lower than the $20.87  billion reported one year ago.  These expenses remain at elevated levels because of the on-going recession and weakness in the housing market; weakness the company says it expects will continue through 2010.

The company made the following statement in its First Quarter Form 10-Q filed with the Securities and Exchange Commission:

 "There is significant uncertainty in the current market environment and any changes in the trends in macroeconomic factors that we currently anticipate, such as home prices and unemployment may cause our future credit-related expenses and credit losses to vary significantly from our current expectations.   Although Treasury's funds under the senior preferred stock purchase agreement permit us to remain solvent and avoid receivership, the resulting dividend payments are substantial.   Given our expectations regarding future losses and draws from Treasury, we do not expect to earn profits in excess of our annual dividend obligation to Treasury for the indefinite future.  As a result of these factors there is significant uncertainty as to our long term financial sustainability."

The loss resulted in a net worth deficit of $8.4 billion as of the end of March, taking into account a $3.3 billion reduction in the deficit related to the adoption of new accounting standards and unrealized gains on available-for sale securities during the first quarter.

Fannie Mae's balance sheet reflects several changes because of new accounting rules including:

• A significant increase in loans and debt and a decrease in trading and available-for-sale securities.
• Separate presentation of the elements of the consolidated MBS trusts (such as mortgage loans, debt, accrued interest receivable and payable) on the face of their condensed consolidated balance sheets.
• Significant increase in allowance for loan losses and significant decrease in reserve for guaranty losses.
• Elimination of substantially all previously recorded guaranty assets and guaranty obligations.

During the quarter Fannie Mae purchased or guaranteed an estimated $191.4 billion loans based on the unpaid principal balance.  This included $40 billion in loans purchased in March from Mortgage Backed Securities (MBS) Trusts. Not including the delinquent MBS purchases, Fannie Mae's purchases financed approximately 516,000 single-family homes and 61,000 multi-family units.  The corporation had a 40.8 percent share of the single-family market.

The company acquired 61,929 single-family properties through foreclosure during the first quarter compared to 47,189 in the fourth quarter.  The total inventory of owned single-family real estate at the end of March was 109,989 compared with 86,155 at the end of December. 

The GSEs single-family serious delinquency rate increased to 5.47 percent as of March 31, 2010 from 5.38 percent as of December 31, 2009, but grew at a slower pace than in each quarter of 2009 as they continued to work with servicers to reduce delays in completing workouts and more modifications and foreclosure alternatives. Total nonperforming loans in Fannies' guaranty book of business were $223.9 billion as of March 31, 2010, compared with $216.5 billion as of December 31, 2009.

Fannie Mae said it had maintained pricing and eligibility standards that promote sustainable home ownership and stability and the risk profile of the loans it acquired remained strong.  Single-family loan acquisitions had a weighted average original loan to value ratio of 69 percent and a weighted average FICO score of 758.

HERE are tables and graphs presented by Fannie Mae in their Credit Supplement.

Due to the loss, Fannie will join Freddie Mac in asking the Treasury Department for additional funding . Fannie Mae has already asked the Acting Director of the Federal Housing Finance Agency (FHFA) which acts as Fannie's conservator, to request a cash infusion from Treasury of $8.4 billion by the end of the second quarter, June 30, 2010.

Fannie Mae President and CEO Mike Williams said of the financial results, "In the first quarter we continued to serve as a leading source of liquidity to the mortgage market, and we made solid progress in our ongoing efforts to keep people in their homes.  Working with our lender partners, we completed 94,000 loan modifications in the quarter, more than half of which were conversions of trial modifications under the Obama Administration's Home Affordable Modification Program."