Fannie Mae prone to political disruption

JAMES JINCARELLI
BUSINESS CORRESPONDENT

Many may remember the collapse of Fannie Mae during the recession of 2007 and 2008, however, what some might not realize is that Fannie Mae just reported earnings of $84 billion for 2013. Fannie Mae has been profitable for eight consecutive quarters and its stock has been increasing considerably since September: as of Tuesday it is at $4.69 a share. William Ackman’s Pershing Square Capital Management purchased $400 million of common stock of Fannie and Freddie last November. Ackman recently said he thinks the Supreme Court will strike down the profit sweep and, as a result, shares could trade at 10 times recent prices. People may think if they go all in on Fannie Mae that they’ll come out with 10 times as much capital. But there are a few problems with Fannie’s profits that may make them appear like the company is doing when in reality it might not be.

Fannie Mae is formally known as the Federal National Mortgage Association and was founded in 1938 as part of the New Deal. It is a government-sponsored enterprise (GSE), though it has been a publicly traded company since 1968. The corporation’s purpose is to expand the secondary mortgage market by securitizing mortgages in the form of mortgage-backed securities, 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 locally based savings and loan associations.

So, why is Fannie Mae in a dangerous spot? Take a look at where its $45.4 billion profit came from. A huge chunk of that arose from the reversal of a write-down of deferred-tax assets. An additional $14.6 billion are gains that are difficult to replicate, so there is a good chance they will not happen again. Taking away those, Fannie is left with $24 billion and about half of that was because of the firm’s ability to borrow at low government-backed rates. Fannie paid about $10.27 billion on the $500 billion it has in long-term debt, while its interest revenue was about $22.12 billion. Without the backing of the government, its rates would increase drastically and Fannie Mae would be operating at a loss of about $2 billion. Even its mortgage guarantee program is so profitable because of the backing of the government. Since Fannie is a financial institution, regulators may require Fannie to keep more capital for the future. If the company was treated in the same way as private banks it would need about $155 billion; however, because of its government backing, regulators may only require to keep about $60 billion in capital. In all reality, the number is going to be between the two, which means Fannie Mae will have to raise around $100 billion in capital.

Fannie Mae’s fate is ultimately political, which could mean that their decisions could favor private sector shareholders or just the opposite. We will see what happens.

Contact the writer:
james.jincarelli@scranton.edu

Leave a Reply

Your email address will not be published. Required fields are marked *