February 17, 2017 / 6:42 PM / 10 months ago

UPDATE 2-Fannie Mae to pay Treasury $5.5 bln, but sees risk of losses from tax cuts

(Recasts with outlook on tax change; adds quote)

By Richard Leong

Feb 17 (Reuters) - U.S. mortgage finance provider Fannie Mae said on Friday it will pay the Treasury $5.5 billion in dividends in March, but warned that it would face losses and again require taxpayer support if President Donald Trump’s pledge to slash corporate taxes comes to fruition.

A significant cut in corporate tax rates, from the current marginal federal rate of 35 percent, would result in Fannie having to write down its deferred tax assets, according to the government-sponsored enterprise.

If the write-down were greater than its capital, Fannie said, it would have to draw on its credit line with the U.S. Treasury Department, as occurred during the global financial crisis more than eight years ago.

“Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require the company to record a substantial reduction in the value of its deferred tax assets in the quarter in which the legislation is enacted,” Fannie Mae said in a statement on its 2016 results.

Fannie’s quarterly dividends stemmed from the $5.04 billion in net income in the fourth quarter, which lifted its annual income to $12.31 billion in 2016 and its total payments to the federal government to $159.9 billion.

The agency’s 2015 net income was $10.95 billion.

Other companies with tax-deferred assets face a similar predicament as Fannie and its sibling, Freddie Mac, but they would have enough capital to offset any write-down.

Fannie and Freddie, however, have been required to reduce their capital reserves under their conservatorship with the Treasury.

Fannie’s capital reserves were $600 million at the end of 2016 but are expected to be nil in 2018. They were dwarfed by Fannie’s deferred tax assets, which stood at $33.53 billion at the end of 2016.

Analysts said, however, that investors would take a large tax-related write-down in stride because it would a one-time loss.

“We think most in the market will understand the one-time nature of large write-downs, such as to deferred tax assets if corporate tax rates fall,” FTN Financial’s interest rates strategist Jim Vogel wrote in a research note.

The Treasury took Fannie and Freddie into conservatorship in September 2008 as the two mortgage companies suffered heavy losses from soured mortgage investments.

The firms, which guarantee home loans and issue mortgage-backed securities, drew $116.1 billion and $71.3 billion in funds, respectively, from the Treasury to cover losses.

Under conservatorship, the Treasury holds special senior preferred stock in the agencies that pay dividends quarterly.

Freddie said on Thursday it will pay $4.5 billion in dividends to the Treasury next month, bringing its cumulative payment to $105.9 billion. (Reporting by Richard Leong; Editing by Grant McCool and Dan Grebler)

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