netrashetty
Netra Shetty
The Federal National Mortgage Association (FNMA) (OTCBB: FNMA), commonly known as Fannie Mae, was founded in 1938 during the Great Depression as part of the New Deal. It was set up as a publicly traded company but it was later chartered by Congress in 1968 as a government-sponsored enterprise (GSE). The corporation's purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities (MBS),[3] allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on thrifts.[4]
The Federal National Mortgage Association (Fannie Mae), the second largest corporation in the United States in terms of assets, buys mortgages from banks and financial institutions and sells mortgage backed securities (MBS), a type of bond, to investors of all sizes. As of February 27, 2010 Fannie Mae guaranteed about 28% of the entire $11.8 trillion U.S. home loans market.[1] Fannie was structured to play a dominant role in the secondary mortgage market and ensure a steady and reliable supply of funds for U.S. homebuyers. In August 2008, the U.S. federal government's implicit backing of Fannie Mae became explicit when former Treasury Secretary Henry Paulson announced that Congress had approved a plan giving the Treasury the authority to bail out Fannie if its capital levels dipped too low.
On September 8, 2008, investors' fears were realized when Paulson announced a comprehensive plan to take Fannie and Freddie under "conservatorship", essentially placing the companies under temporary government control and giving the Treasury the right to pump as much as $100 billion into each company, as well as buy a 79.9% share of both Fannie and Freddie.[2]
On June 16, 2010 Fannie Mae announced it will be delisting from the New York Stock Exchange (NYSE) because it failed to meet exchange requirements.[3] This is because the company's average stock price has fallen below the required $1.00 share price for over 30 days. Fannie Mae's sister company Freddie Mac (FRE) is delisting as well, despite the fact that Freddie Mac just barely met the minimum requirements. Going forward, Fannie Mae's stock will be traded over the counter (OTC) under the ticker FNMA.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Single Family
1.2.2 Housing and Community Development (HCD)
1.2.3 Capital Markets Group
2 Trends and Forces
2.1 Future government support of Fannie Mae is unclear
2.2 Fannie Mae has chased down many of its Non-performing Loans
2.3 Effect of Subprime Meltdown
2.4 Fixed interest rates decrease flexibility
3 Competition
4 References
The Mortgage Bankers Association has since urged the Federal Government to place both Fannie Mae and Freddie Mac into "receivership", the next step past its current "conservatorship". Right now the government controls 79.9% of Fannie Mae and Freddie Mac, with 80% being the threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase. Depending on the accounting measures used, it is estimated that Fannie Mae and Freddie Mac could end up costing the Federal Government $53 billion or save the government $44 billion.[4] Fannie Mae has also begun lobbying the Treasury to reduce its dividend payments on the preferred shares the Treasury owns.[5] This would help Fannie Mae help paying back some of the funds it owes, and also allow it to begin restructuring by reducing the amount of preferred shares the government owns.
For the third quarter of 2010, Fannie Mae posted a net loss of $1.3 billion, which was significantly lower than $18.9 billion net loss it posted for the same period in 2009.[6] It was the 13th consecutive quarterly loss for Fannie Mae, and they requested another $2.5 billion capital infusion from the Federal Government. This pushes the total aid given to Fannie Mae up to $87.6 billion.[6]
Company Overview
Fannie Mae is a Government Sponsored Enterprise (GSE) a hybridized enterprise founded by the U.S. Government endowed with an advantageous set of special privileges, such as exemption from state and local taxes, a $2.25 billion line of credit with the U.S. Treasury, and the implicit backing of the federal government.[7] Fannie Mae's business model is that it earns income from the mortgages it owns, using some of it to pay interest on its mortgage backed securities (MBS); rising default and foreclosure rates, however, meant that more and more of its mortgages weren't generating any income at all, forcing the company to write these mortgages off as losses on its income statement.
The purpose of Fannie Mae is to make it easier for Americans to own a home, and it accomplishes this goal by expanding the supply of funds available for mortgages. For example, when a bank lends out a mortgage, it normally has to wait until the loan is repaid before lending the funds out again. Fannie Mae, however, steps in and buys out the mortgage from the bank, allowing the bank to make a second loan sooner; Fannie Mae meanwhile earns the interest from the mortgage. Fannie Mae also sells bonds tied to the mortgages, called mortgage-backed securities. While the mortgage might not be repaid, Fannie Mae guarantees full repayment of its bonds, allowing Fannie Mae to charge a security premium.
Together, Fannie Mae and Freddie Mac (FRE) hold approximately $5.3 trillion of the $12 trillion total in U.S. residential mortgage debt as of August 4, 2009.[8] Because of this high concentration, many thought a failure at Fannie Mae would wreak havoc in the residential housing market and the economy as a whole because many other large financial institutions held Fannie Mae bonds. Although the government was not obligated to assist Fannie Mae, the potential mayhem caused by Fannie's demise is what many believe led the to government ensure Fannie Mae's continued viability.
On December 24, 2009, The U.S. Treasury Department uncapped the credit line given to Fannie Mae and Freddie Mac for three years, essentially guaranteeing that the companies will survive and eliminating uncertainty about continued government support.[9]
Business and Financial Metrics
At the end of 2009, Fannie Mae had approximately $3.2 trillion in mortgages and other guarantees.[10] In 2009 Fannie Mae had $14.5 billion in net interest income and $7.2 billion guaranty fee income.[11] However, it had losses of $9.9 billion in other than temporary adjustments, a $73.3 billion loss related to derivatives and credit expenses, and a $6.3 billion loss related to other income.[11] Combined, this led to a net loss of $72 billion in 2009.
FNM Financials (In Millions) 2006[12] 2007[12] 2008[12] 2009[12]
Net Interest Income 6,752 4,581 8,782 14,510
Non-Interest Income 1,731 -1,387 -20,471 -10,290
Total Expenses 4,270 8,320 32,860 77,227
Net Income 4,059 -2,050 -58,707 -72,022
Business Segments
Fannie Mae breaks its operations into three business segments: i) Single Family, ii) Housing and Community Development (HCD), and iii) Capital Markets Group.
Single Family
The main source of revenue for the Single Family business is guaranty fees, which decreased from $8.4 billion in 2008 to $8.0 billion in 2009.[13] Fannie Mae's Single Family business had a net loss of $64.0 billion in 2009 compared to its net loss of $27.1 billion in 2008.[13] The large loss despite the $8.0 billion in revenues is due to significant increases in credit-related expenses, including the write down of mortgage backed securities, increases in delinquencies, defaults, and the overall weak housing market across the United States.
Housing and Community Development (HCD)
In 2009 Fannie Mae's HCD segment recorded a net loss of $9.0 billion, compared to its 2008 net loss of $2.2 billion.[14] Its primary source of revenue is guaranty fees, which totaled $675million in 200, an increase from its 2008 fees of $633million.[14] Despite the increase in guaranty fee income, the HCD segment still posted the loss in large part due to a $5.0 billion write down on an investment related to partnership investments.
Capital Markets Group
Fannie Mae's Capital Markets Group business segment recorded a net income of $857 million in 2009, a huge turnaround from its 2008 net loss of $29.4 billion.[15] This segment mainly earns revenue through interest; its net interest income in 2009 was $14.3 billion, a significant increase from its 2008 income of $8.7 billion.[15] The sharp turnaround is mainly due to a large reduction in fair value losses. This loss decreased from $20.1 billion in 2008 to a loss of only $2.1 billion in 2009, largely because the fair values of many of its investments stabilized. Also, this segment was able to take advantage of the low interest rate environment in 2009 and thereby significantly increase its net interest income by replacing older, higher interest debt with lower interest debt. At the same time, they had to pay out less in interest expenses, also helping their net interest income rise.
Trends and Forces
Interest and mortgage rates over time
Future government support of Fannie Mae is unclear
The Obama administration has yet to reach an agreement on whether the U.S. Treasury should provide guarantees for new mortgages once the market stabilizes.[16] The issue is becoming relatively urgent because of a January deadline for that the Treasury Department must meet with a recommendation for the future of the U.S. housing finance system. Some top experts are in favor of an explicit but limited Federal guarantee of mortgages, while others believe this exposes the government to too much risk. The ultimate recommendation by the Treasury Department may hold significant importance to Fannie Mae's future.
Fannie Mae has chased down many of its Non-performing Loans
A loan is generally considered non-performing after it has become delinquent for more than 90 days, meaning the borrower has fallen behind on payments by 90 days. Since Fannie Mae generates a significant portion of its revenues from mortgages, an increase in non-performing loans reduces its revenues and hurts earnings. In 2007, non-performing loans nearly doubled from $13.8 billion to $27.2 billion.[17] However, between 2007 and 2008, its non-performing loans increased to $119.2 billion, a 439% increase from its 2007 levels.[17]
That being said, Fannie Mae has vigorously pursued banks and other lenders who have sold mortgages to Fannie Mae in which there was insufficient or improper documentation about a borrower's income as well as outright lies.[18] Through the first nine months of 2009, Fannie Mae has successfully forced banks to buy back $2.7 billion in loans sold to Fannie Mae. On January 3, 2011 Fannie Mae reached a settlement with Bank of America (BAC) and will be paid $1.52 billion by Bank of America for loans it sold to Fannie Mae which failed to meet its underwriting criteria.[19]
Effect of Subprime Meltdown
The mortgage industry expanded in the late 1990s and early 2000s as the market for subprime loans grew rapidly. Fewer than 100,000 subprime loans were made in 1995, but in 2004, over 1.5 million loans written were considered subprime. Subprime loans are loans made to borrowers with poor credit scores or low incomes. These borrowers are obviously riskier, but this same reason enables banks to charge premium interest rates to compensate for the higher risk. In the early 2000s, banks began pooling mortgages to spread the risk, making subprime loans seem even more lucrative, further expanding the market for them. Since 2007, however, the subprime sector has collapsed as repayment rates have dropped in response to rising mortgage payments and falling home values. About half of all current subprime mortgages have adjustable rates, meaning that the rate of the loan (and, subsequently, the monthly payments) are tied to interest rates. In March of 2007, 13.5% of all subprime mortgages were delinquent, up from 11.5% the year before. Fannie Mae was originally thought to have been safe from the subprime crisis; however, in November 2007, it reported a $1.39 billion loss as a result of an increasingly large number of defaulting mortgages. Fannie posted another loss of $3.6 billion for the fourth quarter, leading to a $2.05 billion loss for 2007. Any questions about Fannie Mae's insulation from the market turmoil have since been answered, as its losses continue to mount.
Fixed interest rates decrease flexibility
The majority of the mortgages that Fannie Mae acquires are fixed rate mortgages, meaning that the amount a borrower pays back is based on the interest rate at the time the mortgage was signed. This can impact Fannie Mae in several ways. Much of Fannie's business involves selling bonds, and it cannot sell a bond at a rate much lower than the current prevailing rate. For instance, If interest rates rise, Fannie Mae's income from the fixed-rate mortgages it currently owns will remain unchanged, but it will be unable to earn money on these mortgages or use them to back securities. This is because if Fannie Mae holds a mortgage with an annual rate of 2.5% but current interest rates are at 5%, it will be unable to earn a profit because it only earns 2.5%, but must pay out 5% for any investor to purchase the bonds.
Competition
Because of Fannie Mae's relatively specific purpose and its GSE status, comparisons to other corporations are difficult to make. The best comparison would be to its sister company, Freddie Mac (FRE). Both have similar charters, are similar in size, and both hold status as GSEs.
Freddie Mac (FRE) is slightly smaller than Fannie Mae. In 2009, Freddie Mac had $17.1 billion in net interest income; however, net losses of $2.7 billion in non interest income and $36.7 billion in non interest expenses contributed to its overall net loss of $21.6 billion in 2009.[20]
2009 Financials (In Billions) Fannie Mae (FNM) Freddie Mac (FRE)[20]
Net Interest Income 14,510 17,073
Non-Interest Income -10,290 -2,732
Total Expenses 77,227 -36,725
Net Income -72,022 -21,553
The Federal National Mortgage Association (Fannie Mae), the second largest corporation in the United States in terms of assets, buys mortgages from banks and financial institutions and sells mortgage backed securities (MBS), a type of bond, to investors of all sizes. As of February 27, 2010 Fannie Mae guaranteed about 28% of the entire $11.8 trillion U.S. home loans market.[1] Fannie was structured to play a dominant role in the secondary mortgage market and ensure a steady and reliable supply of funds for U.S. homebuyers. In August 2008, the U.S. federal government's implicit backing of Fannie Mae became explicit when former Treasury Secretary Henry Paulson announced that Congress had approved a plan giving the Treasury the authority to bail out Fannie if its capital levels dipped too low.
On September 8, 2008, investors' fears were realized when Paulson announced a comprehensive plan to take Fannie and Freddie under "conservatorship", essentially placing the companies under temporary government control and giving the Treasury the right to pump as much as $100 billion into each company, as well as buy a 79.9% share of both Fannie and Freddie.[2]
On June 16, 2010 Fannie Mae announced it will be delisting from the New York Stock Exchange (NYSE) because it failed to meet exchange requirements.[3] This is because the company's average stock price has fallen below the required $1.00 share price for over 30 days. Fannie Mae's sister company Freddie Mac (FRE) is delisting as well, despite the fact that Freddie Mac just barely met the minimum requirements. Going forward, Fannie Mae's stock will be traded over the counter (OTC) under the ticker FNMA.
Contents
1 Company Overview
1.1 Business and Financial Metrics
1.2 Business Segments
1.2.1 Single Family
1.2.2 Housing and Community Development (HCD)
1.2.3 Capital Markets Group
2 Trends and Forces
2.1 Future government support of Fannie Mae is unclear
2.2 Fannie Mae has chased down many of its Non-performing Loans
2.3 Effect of Subprime Meltdown
2.4 Fixed interest rates decrease flexibility
3 Competition
4 References
The Mortgage Bankers Association has since urged the Federal Government to place both Fannie Mae and Freddie Mac into "receivership", the next step past its current "conservatorship". Right now the government controls 79.9% of Fannie Mae and Freddie Mac, with 80% being the threshold for placing them on the federal books. Conservatorship is intended for firms that could be restored to health, while receivership is the end-of-the-line liquidation phase. Depending on the accounting measures used, it is estimated that Fannie Mae and Freddie Mac could end up costing the Federal Government $53 billion or save the government $44 billion.[4] Fannie Mae has also begun lobbying the Treasury to reduce its dividend payments on the preferred shares the Treasury owns.[5] This would help Fannie Mae help paying back some of the funds it owes, and also allow it to begin restructuring by reducing the amount of preferred shares the government owns.
For the third quarter of 2010, Fannie Mae posted a net loss of $1.3 billion, which was significantly lower than $18.9 billion net loss it posted for the same period in 2009.[6] It was the 13th consecutive quarterly loss for Fannie Mae, and they requested another $2.5 billion capital infusion from the Federal Government. This pushes the total aid given to Fannie Mae up to $87.6 billion.[6]
Company Overview
Fannie Mae is a Government Sponsored Enterprise (GSE) a hybridized enterprise founded by the U.S. Government endowed with an advantageous set of special privileges, such as exemption from state and local taxes, a $2.25 billion line of credit with the U.S. Treasury, and the implicit backing of the federal government.[7] Fannie Mae's business model is that it earns income from the mortgages it owns, using some of it to pay interest on its mortgage backed securities (MBS); rising default and foreclosure rates, however, meant that more and more of its mortgages weren't generating any income at all, forcing the company to write these mortgages off as losses on its income statement.
The purpose of Fannie Mae is to make it easier for Americans to own a home, and it accomplishes this goal by expanding the supply of funds available for mortgages. For example, when a bank lends out a mortgage, it normally has to wait until the loan is repaid before lending the funds out again. Fannie Mae, however, steps in and buys out the mortgage from the bank, allowing the bank to make a second loan sooner; Fannie Mae meanwhile earns the interest from the mortgage. Fannie Mae also sells bonds tied to the mortgages, called mortgage-backed securities. While the mortgage might not be repaid, Fannie Mae guarantees full repayment of its bonds, allowing Fannie Mae to charge a security premium.
Together, Fannie Mae and Freddie Mac (FRE) hold approximately $5.3 trillion of the $12 trillion total in U.S. residential mortgage debt as of August 4, 2009.[8] Because of this high concentration, many thought a failure at Fannie Mae would wreak havoc in the residential housing market and the economy as a whole because many other large financial institutions held Fannie Mae bonds. Although the government was not obligated to assist Fannie Mae, the potential mayhem caused by Fannie's demise is what many believe led the to government ensure Fannie Mae's continued viability.
On December 24, 2009, The U.S. Treasury Department uncapped the credit line given to Fannie Mae and Freddie Mac for three years, essentially guaranteeing that the companies will survive and eliminating uncertainty about continued government support.[9]
Business and Financial Metrics
At the end of 2009, Fannie Mae had approximately $3.2 trillion in mortgages and other guarantees.[10] In 2009 Fannie Mae had $14.5 billion in net interest income and $7.2 billion guaranty fee income.[11] However, it had losses of $9.9 billion in other than temporary adjustments, a $73.3 billion loss related to derivatives and credit expenses, and a $6.3 billion loss related to other income.[11] Combined, this led to a net loss of $72 billion in 2009.
FNM Financials (In Millions) 2006[12] 2007[12] 2008[12] 2009[12]
Net Interest Income 6,752 4,581 8,782 14,510
Non-Interest Income 1,731 -1,387 -20,471 -10,290
Total Expenses 4,270 8,320 32,860 77,227
Net Income 4,059 -2,050 -58,707 -72,022
Business Segments
Fannie Mae breaks its operations into three business segments: i) Single Family, ii) Housing and Community Development (HCD), and iii) Capital Markets Group.
Single Family
The main source of revenue for the Single Family business is guaranty fees, which decreased from $8.4 billion in 2008 to $8.0 billion in 2009.[13] Fannie Mae's Single Family business had a net loss of $64.0 billion in 2009 compared to its net loss of $27.1 billion in 2008.[13] The large loss despite the $8.0 billion in revenues is due to significant increases in credit-related expenses, including the write down of mortgage backed securities, increases in delinquencies, defaults, and the overall weak housing market across the United States.
Housing and Community Development (HCD)
In 2009 Fannie Mae's HCD segment recorded a net loss of $9.0 billion, compared to its 2008 net loss of $2.2 billion.[14] Its primary source of revenue is guaranty fees, which totaled $675million in 200, an increase from its 2008 fees of $633million.[14] Despite the increase in guaranty fee income, the HCD segment still posted the loss in large part due to a $5.0 billion write down on an investment related to partnership investments.
Capital Markets Group
Fannie Mae's Capital Markets Group business segment recorded a net income of $857 million in 2009, a huge turnaround from its 2008 net loss of $29.4 billion.[15] This segment mainly earns revenue through interest; its net interest income in 2009 was $14.3 billion, a significant increase from its 2008 income of $8.7 billion.[15] The sharp turnaround is mainly due to a large reduction in fair value losses. This loss decreased from $20.1 billion in 2008 to a loss of only $2.1 billion in 2009, largely because the fair values of many of its investments stabilized. Also, this segment was able to take advantage of the low interest rate environment in 2009 and thereby significantly increase its net interest income by replacing older, higher interest debt with lower interest debt. At the same time, they had to pay out less in interest expenses, also helping their net interest income rise.
Trends and Forces
Interest and mortgage rates over time
Future government support of Fannie Mae is unclear
The Obama administration has yet to reach an agreement on whether the U.S. Treasury should provide guarantees for new mortgages once the market stabilizes.[16] The issue is becoming relatively urgent because of a January deadline for that the Treasury Department must meet with a recommendation for the future of the U.S. housing finance system. Some top experts are in favor of an explicit but limited Federal guarantee of mortgages, while others believe this exposes the government to too much risk. The ultimate recommendation by the Treasury Department may hold significant importance to Fannie Mae's future.
Fannie Mae has chased down many of its Non-performing Loans
A loan is generally considered non-performing after it has become delinquent for more than 90 days, meaning the borrower has fallen behind on payments by 90 days. Since Fannie Mae generates a significant portion of its revenues from mortgages, an increase in non-performing loans reduces its revenues and hurts earnings. In 2007, non-performing loans nearly doubled from $13.8 billion to $27.2 billion.[17] However, between 2007 and 2008, its non-performing loans increased to $119.2 billion, a 439% increase from its 2007 levels.[17]
That being said, Fannie Mae has vigorously pursued banks and other lenders who have sold mortgages to Fannie Mae in which there was insufficient or improper documentation about a borrower's income as well as outright lies.[18] Through the first nine months of 2009, Fannie Mae has successfully forced banks to buy back $2.7 billion in loans sold to Fannie Mae. On January 3, 2011 Fannie Mae reached a settlement with Bank of America (BAC) and will be paid $1.52 billion by Bank of America for loans it sold to Fannie Mae which failed to meet its underwriting criteria.[19]
Effect of Subprime Meltdown
The mortgage industry expanded in the late 1990s and early 2000s as the market for subprime loans grew rapidly. Fewer than 100,000 subprime loans were made in 1995, but in 2004, over 1.5 million loans written were considered subprime. Subprime loans are loans made to borrowers with poor credit scores or low incomes. These borrowers are obviously riskier, but this same reason enables banks to charge premium interest rates to compensate for the higher risk. In the early 2000s, banks began pooling mortgages to spread the risk, making subprime loans seem even more lucrative, further expanding the market for them. Since 2007, however, the subprime sector has collapsed as repayment rates have dropped in response to rising mortgage payments and falling home values. About half of all current subprime mortgages have adjustable rates, meaning that the rate of the loan (and, subsequently, the monthly payments) are tied to interest rates. In March of 2007, 13.5% of all subprime mortgages were delinquent, up from 11.5% the year before. Fannie Mae was originally thought to have been safe from the subprime crisis; however, in November 2007, it reported a $1.39 billion loss as a result of an increasingly large number of defaulting mortgages. Fannie posted another loss of $3.6 billion for the fourth quarter, leading to a $2.05 billion loss for 2007. Any questions about Fannie Mae's insulation from the market turmoil have since been answered, as its losses continue to mount.
Fixed interest rates decrease flexibility
The majority of the mortgages that Fannie Mae acquires are fixed rate mortgages, meaning that the amount a borrower pays back is based on the interest rate at the time the mortgage was signed. This can impact Fannie Mae in several ways. Much of Fannie's business involves selling bonds, and it cannot sell a bond at a rate much lower than the current prevailing rate. For instance, If interest rates rise, Fannie Mae's income from the fixed-rate mortgages it currently owns will remain unchanged, but it will be unable to earn money on these mortgages or use them to back securities. This is because if Fannie Mae holds a mortgage with an annual rate of 2.5% but current interest rates are at 5%, it will be unable to earn a profit because it only earns 2.5%, but must pay out 5% for any investor to purchase the bonds.
Competition
Because of Fannie Mae's relatively specific purpose and its GSE status, comparisons to other corporations are difficult to make. The best comparison would be to its sister company, Freddie Mac (FRE). Both have similar charters, are similar in size, and both hold status as GSEs.
Freddie Mac (FRE) is slightly smaller than Fannie Mae. In 2009, Freddie Mac had $17.1 billion in net interest income; however, net losses of $2.7 billion in non interest income and $36.7 billion in non interest expenses contributed to its overall net loss of $21.6 billion in 2009.[20]
2009 Financials (In Billions) Fannie Mae (FNM) Freddie Mac (FRE)[20]
Net Interest Income 14,510 17,073
Non-Interest Income -10,290 -2,732
Total Expenses 77,227 -36,725
Net Income -72,022 -21,553