Fannie Mae Profit Slides Amid Lower Rates

Fannie Mae said it would send a $2.9 billion dividend payment to the U.S. Treasury in September as revenue and profit declined sharply in its latest quarter amid low interest rates.

The mortgage-finance company posted net income of $2.95 billion for the second quarter, down from $4.64 billion a year prior and $1.14 billion in the first quarter. Revenue dropped 12% to $5.46 billion.

The drop in profit was driven primarily by falling long-term interest rates, which hurt the value of derivatives Fannie uses to manage risk. Sister company Freddie Mac on Tuesday posted a second-quarter profit decline for the same reason.

The percentage of Fannie-backed mortgages more than 90 days delinquent fell to 1.32% from 1.44% in the first quarter and 1.66% in the same quarter a year prior as home prices continued to rise and the unemployment rate remained low.

In the quarter, Fannie booked a $1.6 billion benefit for credit loss reserves, meaning it thinks less of its loans are likely to default. In the quarter last year, it increased its reserves by $1.03 billion.

The diminished profits come as Fannie's and Freddie's regulator and some lawmakers have expressed concern over their dwindling capital reserves. Under the terms of the companies' bailout agreement with the Treasury, they send nearly all profits to the government and are slated to wind down their capital reserves to zero dollars by 2018.

So far, that drop in reserves hasn't caused Fannie or Freddie to require more bailout money. Fannie reported a net worth of $4.1 billion as of June 30.

Still, any blip in the housing market or volatility in the derivatives values could cause Fannie or Freddie to need taxpayer funds.

Fannie and Freddie still have billions remaining in bailout funds to draw on from the Treasury if needed. Though the companies have little capital themselves, investors look to those funds for assurance.

White House and Treasury officials in the past have said that building capital at Fannie and Freddie would hurt taxpayers, since it would come out of profits that are otherwise sent to the Treasury.

Fannie's drop in profits emphasizes an accounting quirk that impacts both Fannie's and Freddie's quarterly profitability.

Fannie and Freddie have large investment portfolios whose values, like those of all bonds, rise and fall as interest rates change. The companies use derivatives to hedge interest-rate risk, but for accounting purposes, the derivatives and other hedging instruments are valued at a different time than the hedged assets, causing large profits or losses to appear in the short term.

Fannie Mae took $1.7 billion in fair-value losses in the quarter, compared with gains of $2.6 billion in the prior-year period.

Fannie buys loans from lenders, wraps them into securities and provides guarantees to make investors whole if the loans default.

Write to Austen Hufford at [e-mail]

(END) Dow Jones Newswires

August 04, 2016 09:15 ET (13:15 GMT)

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