fannie mae
Fannie Mae Posts Loss Despite Business Boom By Albert B. Crenshaw and David S. Hilzenrath Washington Post Staff Writers Wednesday, July 16, 2003; Page E01 Fannie Mae reported a big drop in second-quarter earnings due to changes in the value of derivatives contracts, even though its business expanded significantly. The mortgage-finance giant also said that it will reduce its interest-rate risk and that it will be less profitable in the second half of the year. The Washington-based firm, the biggest buyer of home mortgages, said the total volume of its business -- the amount of mortgages it owns plus the value of the mortgage-backed securities it has issued or guaranteed -- grew 29 percent in the second quarter as homeowners refinanced at record levels. But declining interest rates triggered a paper loss of $1.9 billion on Fannie Mae's portfolio of derivatives. The company said its core business earnings, which exclude these paper losses, grew substantially. Fannie Mae earned $1.1 billion ($1.09 cents a share) in the three months ended June 30, down from $1.46 billion ($1.44) in the same quarter of 2002. Not including the accounting impact of the paper loss on its derivatives, which Fannie Mae uses to hedge against the risk of interest rate swings, the company said would have earned $1.86 billion in the quarter, compared with $1.57 billion a year earlier. Fannie said core business earnings better reflect the economic reality of its performance because the losses booked on its derivatives -- accounting rules require it to carry interest-rate hedges at market value -- are not realized. The mark-to-market accounting rule, since it was established in January 2001, has caused wide swings in the reported net income of Fannie Mae and its smaller rival, Freddie Mac. In the first six months of the year, Fannie earned $3.04 billion ($3.02), an increase of more than 13 percent from the same period a year ago, the company said yesterday. On a core business earnings basis, Fannie earned $3.71 billion in the first half, compared with $3.09 billion a year earlier. District-based Fannie Mae, formally known as the Federal National Mortgage Association, is a Congressionally chartered, shareholder-owned corporation that buys residential mortgages to supply cash to the nation's housing markets. The company, its profits and accounting practices have been in the spotlight in recent months as a result of the admission by Freddie Mac, a similar government-sponsored enterprise, that it improperly accounted for its derivatives and would be restating several years' worth of earnings. The companies finance their mortgage purchases by issuing debt of their own, and, as a result, must cope with the risk that changes in interest rates could leave them owning mortgages with lower rates than they must pay on their own debt. That happened to Fannie Mae when interest rates took off at the beginning of the 1980s, causing severe losses for several years. Fannie Mae uses a variety of techniques to deal with interest-rate risk, including issuance of callable debt that can be prepaid if interest rates fall and various options and derivatives that cause the duration of the company's debt to closely reflect that of its assets. Yesterday, Fannie Mae said in documents accompanying its earnings statement that the effective duration gap between its assets and liabilities has shrunk, meaning that the maturity of both its assets and liabilities are more closely matched. A wider gap means Fannie is taking on more risk from swings in interest rates. A smaller gap generally means less interest-rate risk, but potentially lower profits. The gap was as high as 10 months during 2002. The company has been working to minimize the gap and said it will attempt to keep it at less than six months in the future. The hedging that those efforts would entail could reduce future profitability, the company said. They're trading lower earnings volatility for lower income but more smoother numbers going forward, said Paul J. Miller, a mortgage banking analyst at the Friedman Billings Ramsey investment firm. To maintain a strong credit rating, we know we must . . . show a stable and predictable pattern of earnings as befits a well-managed and high quality company, Fannie Mae Chief Financial Officer Timothy Howard said in a conference call with analysts. Fannie Mae's stock closed at $69.06 yesterday, down $2.32 from the day before. The market was reacting in part to the company's prediction that as rates bottom out, its core earnings will be lower during the second half of this year than during the first half, analysts said. In addition, core earnings for the second quarter were a penny a share lower than the consensus expectations of Wall Street analysts.
fannie mae
Fannie Mae To Face Review Oversight Agency Seeks Bigger Budget By David S. Hilzenrath And Kathleen Day Washington Post Staff Writers Tuesday, July 15, 2003; Page E01 Federal regulators already investigating accounting errors at mortgage lending giant Freddie Mac told Congress yesterday that they plan to conduct a special accounting review of its twin, Fannie Mae. The Office of Federal Housing Enterprise Oversight (OFHEO), which supervises both companies, asked Congress to support $4.5 million of supplemental funding to its $30 million budget this year to undertake the examination of Fannie and complete the investigation of Freddie. Though funded through assessments on the companies, the agency needs congressional approval of its budget. Lawmakers have criticized the OFHEO for failing to detect the problems at Freddie, and some have proposed transferring its responsibilities to the Treasury Department. In June, days before Freddie reported that its own incompetence had contributed to between $1.5 billion and $4.5 billion of improper accounting, the OFHEO issued an annual report saying that Freddie's internal controls and auditing were effective. Armando Falcon Jr., outgoing director of the agency, said in an interview yesterday that, in light of the problems at Freddie, members of Congress have asked him whether there is anything wrong with Fannie's accounting. Falcon said he has no reason to believe Fannie has broken accounting rules, but is unable to answer such questions without a special review. Staff members at House and Senate appropriations committees have expressed support for the request, he added. He said, it's not the role of the safety and soundness regulator to certify that the financial statements are presented in conformance with generally accepted accounting principles. That is the role of the independent auditor. Fannie spokesman Chuck Greener said Fannie complies fully with GAAP and will not have to correct past accounting. Financial statements that Freddie is in the process of correcting were originally approved by auditor Arthur Andersen. Fannie's financial statements have been certified by KPMG LLP. In the same June report that praised Freddie's internal controls, the OFHEO said Fannie's internal and external auditing were effective. Falcon said the agency has not determined the scope of the planned review of Fannie's accounting. It may focus on policies rather than the way Fannie accounted for individual transactions, he said. . On Thursday, Falcon will testify before the Senate Banking Committee on his agency's preliminary findings on Freddie Mac's accounting problems. A House Financial Services subcommittee also has a hearing scheduled that day on legislation proposing that oversight of Fannie Mae and Freddie Mac be moved from the Department of Housing and Urban Development , to the Treasury Department. The Treasury supports that idea, officials said. Rep. Michael G. Oxley (R-Ohio), the Financial Services Committee chairman, announced that Treasury Secretary John W. Snow would testify next week about how the two companies should be regulated. Yesterday, however, a Treasury spokesman said that will not happen. Due to a scheduling conflict, Secretary Snow will not be testifying on July 25th,said spokesman Rob Nichols. We are working with the committee to reschedule the appearance for September.
Us economy: Crisis Possible at Fannie Mae, Freddie Mac
By the way, I know about this mortgage modelling. This is how I used to make my bread until a few years ago. Faniie Mae says this: Fannie Mae shares fell 18 percent in September after the lender reported its duration gap, a key measure of interest-rate risk, widened to minus 14 in August, outside its preferred range of plus or minus 6. The gap meant Fannie Mae's assets would be repaid 14 months sooner than its then $780 billion of debt. The gap had closed to zero in January, Fannie Mae said. And I say: garbage. Who cares what the duration gap is, given all that junk that goes into their models? And even if their callculations are meaningful, what they call duration is just the sum of the entries in the first gradient of the price of their mortgage portfolio. Some sort of a semi-elasticity with respect to a parallel shift to the term structure, that is. Doesn't say much about the risks they are exposed to. Sabri + Top Financial News 03/10 16:22 Poole Says Crisis Possible at Fannie Mae, Freddie Mac (Update6) By Craig Torres and Albert Yoon Washington, March 10 (Bloomberg) -- Fannie Mae and Freddie Mac, which own or guarantee 42 percent of all U.S. home mortgages, may lack adequate capital to weather a disruption in financial markets, St. Louis Federal Reserve President William Poole said. The two government-chartered companies hold capital far below that required of regulated banking institutions, Poole told an Office of Federal Housing Enterprise Oversight symposium. Should either firm be rocked by a mistake or by an unforecastable shock, in the absence of robust contingency arrangements the result could be a crisis in U.S. financial markets, he said. Shares of Fannie Mae and Freddie Mac tumbled as Poole suggested severing the government's implied backing of the companies. Fannie Mae plunged $4.35 to $58.93 on the New York Stock Exchange. The shares 6.9 percent drop was the biggest decline since October 1998. Freddie Mac declined $3.20 to $50.80. Poole's comments echoed criticism leveled against Fannie Mae and Freddie Mac by competitors such as Wells Fargo Co. and by Representative Richard Baker of Louisiana, chairman of the House subcommittee on capital markets. They have said the companies use their government ties to boost borrowings to levels that could pose a risk to taxpayers. Fannie Mae and Freddie Mac own or guarantee $3.1 trillion of mortgages. The comments also come after Fannie Mae last year wrote down the value of financial contracts used to hedge against interest rate swings by $4.55 billion. Fannie Mae said it typically holds the contracts, also known as derivatives, to maturity, meaning its only risk is default by a counterparty, not quarterly changes in their values. Accounting rules require the contracts be written down to market values even if they are not sold. Pull Sponsorship The government should eliminate the Treasury's authority to buy $2.25 billion of the companies' debt to remove any implied sponsorship and appearances to investors that the U.S. would bail out the firms in times of trouble, Poole said. Eliminating the authority would signal the government is serious when it says that there is no guarantee of the debts, he said. Fannie Mae and Freddie Mac should also add to their capital over a period of several years, he said. The companies also need to boost their capital to levels similar to that required for banks and other regulated institutions, he said. Fannie Mae and Freddie Mac are required to keep capital of about 4 percent of their on-balance sheet assets, he said, while federally insured banks hold capital equal to about 11 percent of their assets. It seems hard to justify not doing what he proposes, said James McGlynn, who manages $5 billion at Summit Investment Partners in Cincinnati. McGlynn owns securities that would benefit if Fannie Mae shares decline. Stringent Requirements Fannie Mae and Freddie Mac countered that their capital standards are more stringent than required of banks. The Office of Federal Housing Enterprise Oversight, or Ofheo, is their main regulator. Our capital is tied to risk, and we are in one single line of business which is the lowest-risk lending that is done, said Sharon McHale, a Freddie Mac spokeswoman. So when we tie risk to capital standards, ours are much more stringent. Fannie Mae said Poole's speech suggests he does not understand the company's capital structure. While there's no current risk overhanging the mortgage lenders, now is the time to address potential problems brought on by their size and influence in the mortgage markets, Poole said. Fannie Mae and Freddie Mac make money by buying loans from banks at higher rates than they pay to borrow. They sell debt to fund mortgage purchases and also package mortgages into securities for sale to investors. Outstanding debt sold by the companies totals $855 billion for Fannie Mae and almost $700 billion for Freddie Mac. Housing Boom
