Fannie Mae Loses $1.2bn in Q210, Treasury Commitment Reaches $84.6bn

Fannie Mae posted a net loss of $1.2bn in Q210 after close of markets today. The GSE will also seek an additional $1.5bn in funds from the Treasury Department under the terms of the senior preferred stock purchase agreement to eliminate the company’s net worth deficit. With total Treasury funding reaching $84.6bn, Fannie said it “does not expect to earn profits in excess of its annual dividend obligation to Treasury for the indefinite future.” After paying $1.9bn in senior preferred stock dividends to the Treasury, the net loss attributed to common stockholders was $3.1bn in Q210, compared to $13.1bn in Q110. Fannie’s revenue was $4.5bn in Q210, up 49% from $3bn in Q110, the result of an increase to net interest income, which totaled $4.2bn, up 51% from $2.8bn in Q110. Fannie said the increase in net interest income was due almost entirely to purchases from single-family mortgage-backed securities (MBS) trusts. The substantial majority of the loans purchased are four or more monthly payments delinquent, and Fannie said the cost of holding these loans in the company’s portfolio is less than the cost of advancing delinquent payments to MBS certificate holders. Fannie said it reduced its credit related expenses — which includes the provision for credit losses and foreclosure property expenses — to $4.9bn, down from $11.9bn in Q110. The reduction is due to an update in the company’s loan-loss allowance model to use mark-to-market loan-to-value (LTV) ratios as opposed to LTV ratios at origination when it calculates loss severity. That accounting change resulted in a decrease in the allowance for loan losses of approximately $1.6 billion. In addition, credit related expenses were reduced because of a decline in seriously delinquent loans, which now total 4.99% of the Fannie Mae portfolio, down from 5.47% in Q110, and a decrease in average loss severities. The improvement to credit related expenses was impacted by a $1.1bn provision for losses on preforeclosure property taxes and insurance receivables. Outside of the loss, it’s been a rough quarter for Fannie, as well as fellow government-sponsored enterprise Freddie Mac. During Q210, both Fannie and Freddie were ordered to de-list from the New York Stock Exchange. The Q210 GSE results reflect ongoing distress in mortgage finance and mortgage-backed securities (MBS) markets. In 2009, the securitization market stood at $1.5trn. Total securities activity by Fannie was $807m in 2009 and Freddie $475m. Freddie and Fannie are also the top two institutional investors in non-agency mortgage-backed securities. Fannie posted an $11.5bn net Q110 loss, after adopting Financial Accounting Standards (FAS) 166 and 167. In order to cover a net worth deficit at quarter-end, the Federal Housing Finance Agency (FHFA), acting as Fannie’s conservator, requested $8.4bn in aid from the Treasury Department. Including the Q210 draw-down, total aid to Fannie Mae is now at $86.1bn under the senior preferred stock purchase agreement with the Treasury. In 2009, the GSEs’ losses totaled $93.6bn, and draws under the Treasury’s preferred stock agreements associated with those losses totaled $66.1bn. Fannie and Freddie forced lenders to repurchase $3.1bn of faulty mortgages out of their securities and off their books in Q110, up 64% from nearly $1.9bn one year earlier. The FHFA in July issued 64 subpoenas to various financial entities, seeking documentation related to private-label MBS in which the two GSEs invested. The FHFA directed the GSEs in June to de-list from the NYSE and any other national securities exchange. The direction came after the price of their common stock hovered near the minimum average closing price of $1 for more than 30 days for most months since the conservatorship took effect in September 2008. Write to Austin Kilgore. The author held no relevant investments. Diana Golobay contributed to this report.