* Fannie Mae posts fourth quarter profit of $1.3 billion
* Firm will make smallest dividend payment to taxpayers
* CEO sees risks it could need to draw from the Treasury
(Adds comments by firm CEO)
By Jason Lange
WASHINGTON, Feb 20 Fannie Mae will
make its smallest payment to taxpayers in more than four years
after large derivatives losses crimped its fourth-quarter
profit, the government-controlled mortgage financier said on
Fannie Mae said a drop in long-term interest rates sharply
reduced the value of the derivatives contracts it uses as hedges
in financial markets, adding that low capital buffers are
raising the risk it could need taxpayer money in the future.
The derivatives losses helped reduce quarterly profit to
$1.3 billion, about 80 percent less than a year earlier, and the
$1.9 billion check that Fannie Mae will cut for the Treasury in
March will be the smallest since the second quarter of 2010.
"Because we will have an ever smaller cushion to absorb
losses, the possibility of our need to take a draw from Treasury
increases over time," Tim Mayopoulos, Fannie Mae's chief
executive, said in a call with journalists.
Fannie Mae, the nation's largest source of mortgage fund,
and its sister firm Freddie Mac were bailed out by the
government at the height of the financial crisis in 2008. Under
the terms of their rescue, they are required to sweep their
profits into the Treasury, a provision being challenged in court
by several groups of investors.
The sensitivity of the firms' profits to financial market
swings underscores the risk that they could have to draw
taxpayer aid again, as the bailout rules limit how much capital
they can hold in reserve.
Even so, rising interest rates can help the firm's profits
by boosting the value of its derivatives, a scenario many
analysts see as likely given expectations the Federal Reserve
will begin a cycle of interest rate hikes this year.
Mayopoulos said Fannie Mae expects to remain profitable on
an annual basis for the foreseeable future, but changes in rates
could lead to "significant" swings in quarterly results.
The possibility of another taxpayer draw raises pressure on
the U.S. Congress to overhaul housing finance laws, although a
real push on legislation is not expected anytime soon.
Taxpayers pumped $116.1 billion into Fannie Mae following
the U.S. housing market collapse, while Freddie Mac was propped
up with $71.3 billion.
Like Fannie Mae, Freddie Mac was also hit by derivatives
losses in the fourth quarter, which led to its smallest
quarterly dividend payment since 2009.
Both firms have already paid in dividends more than they
received in aid. Once payments related to their fourth-quarter
earnings are made, they will have forked over about $228 billion
(Reporting by Jason Lange; Editing by Chizu Nomiyama, Lisa Von
Ahn and Meredith Mazzilli)