By Margaret Chadbourn
WASHINGTON, April 2 Mortgage finance company
Fannie Mae posted a record $7.6 billion in quarterly
earnings, but it refrained from booking a tax-related gain that
would have allowed the bailed-out company to repay as much as
$59 billion to the government.
The U.S.-controlled company said it expects to be profitable
in the future. Profits would allow it to record gains on
billions of dollars worth of assets it had written down. That
would help Fannie Mae repay roughly $117 billion it owes the
U.S. Treasury for a taxpayer rescue during the financial crisis.
But Fannie Mae executives told reporters on a conference
call that the company concluded it could not be sure enough of
the timing of future profits to record that gain. If Fannie Mae
had taken the gain, it would have reduced the company's
eligibility to borrow cheaply from the Treasury. This could have
forced the company to pay more to borrow in the market.
"It was more of a defensive decision aimed at maintaining
potential funding rather than a regulatory concern about future
earnings," said Isaac Boltansky, a policy analyst at Compass
Point Research & Trading.
Fannie Mae's regulator, the Federal Housing Finance Agency,
approved this decision, and Fannie Mae said in a filing that it
expects to start taking those tax-related gains as early as the
first quarter of 2013.
The future of Fannie Mae and its smaller rival Freddie Mac
is in question as lawmakers try to figure out the best way to
minimize taxpayer exposure to mortgage funding without
pressuring the housing market. The U.S. government seized the
two housing financiers in 2008 during the housing market crash
and financial crisis as losses mounted on soured loans.
Fannie Mae missed its March 18 filing deadline for its
fourth-quarter financial results and said it needed more time to
analyze its deferred tax assets which are essentially prepaid
taxes whose benefit can be realized in the future.
When companies are unsure about their ability to earn enough
profit in a short enough time frame, they essentially write down
deferred tax asset through recording a "valuation allowance." If
earnings are later expected to be high enough, the valuation
allowance can be reversed, resulting in big one-time gains.
Fannie Mae was trying to decide whether it would earn enough
money soon enough to merit reversing the valuation allowance.
"This is a thorny accounting situation for management and
those making accounting decisions," said Jim Vogel, head of
interest rate strategy at FTN Financial in Memphis, Tennessee.
Accounting concerns have dogged Fannie Mae for years. In
2006, a report from its then-regulator found the company had
consistently used aggressive accounting to defer income and
expenses, resulting in steady profit growth, and high bonuses
for company executives.
On Tuesday, Fannie Mae reported that its fourth-quarter
earnings helped it rack up $17.2 billion of profit in 2012, its
first year in the black since 2006.
As the housing market has stabilized, Fannie Mae and Freddie
Mac have begun recording profits again. U.S. home
prices in January were 8.1 percent higher than a year earlier
and mortgage delinquencies in the fourth quarter fell to their
lowest level since 2008.
Fannie Mae Chief Executive Officer Timothy Mayopoulos said
in a conference call with reporters that "2012 really marked a
turning point for us."
Earlier this year the U.S. government eased some of the
terms of the bailout for Fannie Mae and Freddie Mac. The easier
terms allow the companies to give most of their profits to the
government. Previously, the companies had to pay dividends to
the government even if they were not profitable which forced
them to draw down on lines of credit to meet these obligations.
BIGGER QUESTIONS LOOM
Fannie Mae and Freddie Mac buy and guarantee home loans that
meet their standards and package them into bonds. The companies
own or guarantee $5.2 trillion in mortgages, and along with the
Federal Housing Administration are backing 9 out of every 10
U.S. mortgage loans now.
Congress and the White House have made little progress in
advancing legislation to determine the future of the two
mortgage companies, though both Republicans and Democrats say
they should be wound down.
"I don't think that policymakers should look at our return
to profitability as a reason not to address what the structure
of the future of housing finance should be," said Fannie Mae's
Republican Senator Bob Corker reiterated his call that
so-called government sponsored enterprises (GSE) profits not
become an excuse for congressional inaction and said there is a
need for long-term reform of the U.S. housing finance system.
"I'm glad Fannie Mae is showing an increase in income, but
we have to remember that this is largely because we have crowded
out private capital and made Fannie or Freddie the only viable
execution option for new loans," he said in a statement.
Corker was among a bipartisan group of U.S. senators that
introduced a bill last month to prevent the government from
using fees collected by Fannie Mae and Freddie Mac to pay for
other government programs.
Since the announcement of Fannie Mae's record earnings
earlier on Tuesday, the risk premiums, or spreads, of both
Fannie Mae's and Freddie Mac's bonds over comparable Treasuries
narrowed 0.02 percentage points from Monday's close. Five-year
Fannie Mae debt was yielding 10 basis points above comparable
"This says the housing market is doing well. Their losses on
their foreclosed homes are falling, but the rate is still quite
high. Rising home prices and falling delinquencies have improved
Fannie's profitability," said Mary Beth Fisher, head of U.S.
interest-rate strategy at SG Corporate & Investment Banking in
For the first time since house prices started slumping in
the summer of 2006, a closely watched barometer for housing
prices showed that all of the 20 major cities tracked by the
S&P/Case Shiller Home Price Index rose on a year-over-year basis