|
Federal
National Mortgage Association
Type: Public
Founded: 1938
Location: Washington, DC
Key people: Daniel Mudd, Chief Exec. Officer, Exec. VP
Industry: Credit Services
Products: Financial Services
Revenue: $53.8 billion (2003)
Employees: 5,055
Website: www.fanniemae.com
The Federal National Mortgage Association (FNMA;
NYSE: FNM), commonly known as Fannie Mae, is a United States Government-sponsored
corporation created in 1938 to establish a secondary market for
mortgages insured by the Federal Housing Administration (FHA). Fannie
Mae buys mortgages on the secondary market, pools them and sells
them as mortgage-backed securities to investors on the open market.
This secondary mortgage market helps to replenish the supply of
lendable money for mortgages and ensures that money continues to
be available for new home purchases. The name "Fannie Mae"
is a creative acronym-portmanteau of the company's full name that
has been adopted officially for ease of identification.
History
In 1968, the Federal National Mortgage Association
was partitioned into two separate entities—one wholly owned
by the government and known as the Government National Mortgage
Association (Ginnie Mae), and the other to retain the name Federal
National Mortgage Association (Fannie Mae). At this time, Fannie
Mae expanded its charter to buying other sorts of mortgages besides
the government-insured ones it had traditionally purchased. Fannie
Mae became fully private in 1970 [1].
Business
Fannie Mae is a consistently profitable corporation.
While it receives no direct government funding or backing, it has
certain looser restrictions placed on its activities than normal
financial institutions. For example, it is allowed to sell mortgage
backed securities with half the capital backing them up than is
required by other financial institutions. Critics, including Alan
Greenspan, say that this is only allowed because investors seem
to think that there is a hidden, or implied, guarantee to the bonds
that Fannie Mae sells ([2]). Although the company describes them
as having no guarantee, nevertheless the vast majority of investors
believe that the Government would prevent them from defaulting on
their debt, and so buy bonds at very low interest rates as compared
to others having like risk.
The largest mortgage originator in the United
States is Countrywide Financial, which is an almost exclusive Fannie
Mae partner, although they have sold small amounts to government
sponsored enterprise (GSE) competitors. Their "loan production"
during 2003 was $434.9 billion, of which most was sold to Fannie
Mae.
While Mortgage Originators can securitize and
sell the mortgages themselves, GSEs can leverage their balance sheet
further, receive lower rates on both assets and liabilities, and
have a record of packaging and selling mortgages with greater success.
Conforming loans
Because of its stake in the mortgage market
and because of its history, Fannie Mae (along with Freddie Mac)
sets the limit each year on the size of a conforming loan based
on the October to October changes in mean home price, above which
a mortgage is considered a jumbo loan, and has higher rates associated
with it. This is because both Fannie Mae and Freddie Mac only buy
loans that are conforming, to repackage into the secondary market,
making the demand for non-conforming loans much less. By virtue
of the laws of supply and demand, then, it is harder for lenders
to sell the loans, thus it would cost more to the consumers (typically
1/4 to 1/2 of a percent.) The conforming loan limit is 50 percent
higher in Alaska, Hawaii, Guam and the US Virgin Islands.
Financials
FNMA is a financial corporation which uses
derivatives to "hedge" their cash flow. Derivative products
they use include interest rate swaps and options to enter interest
rate swaps ("pay-fixed swaps", "receive-fixed swaps",
"basis swaps", "caps and swaptions", "forward
starting swaps"). Here's a guide through some of its financials
and accounting.
* Article about its accounting: Barron's:
Fannie Mae faces more income issues - Banks - Financial - Real Estate
- Financial Services - General
* SEC filings: SEC - Company Information SEC
EDGAR - 10-K 2003 (EDGAR Online) (FNM: SEC Filings for FANNIE MAE
- Yahoo! Finance) (Investor Relations: SEC Filings)
"transfer negative numbers to its balance
sheet under "accumulated other comprehensive income,"
or AOCI." (Page 123 - "Balance Sheets" - "Stockholders?
Equity" - "Accumulated other comprehensive loss")
([3])
"2002 earnings of $6.4 billion would have
been overwhelmed by $8.9 billion in cash-flow hedging losses."
(Page 124 - "Accumulated Other Comprehensive Income (Loss)"
- "Net cash flow hedging losses on derivatives hedging debt").
"$3 billion in losses that were recognized
in 2002-2003" (Page 122 - "Statements of Income"
- "Other expenses" - "Debt extinguishments, net").
"$19 billion paid to settle underwater
interest-rate swaps in those years." (Page 125 - "Cash-Flows"
- "Cash flows from (used in) financing activities" - "Net
payments to purchase or settle hedge instruments").
"interest rate swaps on its books rose
from $23 billion in 2002 to $149 billion in 2003." (Page 79
- Table 30 "Cash flow hedges" - "Receive-fixed swaps").
"exclude its AOCI numbers from the calculations
of capital" (Page 158 - "Core capital" is "Stockholders'
Equity" excluding AOCI).
Duration gap
Main article: duration gap
* UPDATE - Fannie Mae average duration gap
widens in April
"The company said that in April its average
duration gap widened to plus 3 months in April from zero in March."
"The Washington-based company aims to keep its duration gap
between minus 6 months to plus 6 months. From September 2003 to
March, the gap has run between plus to minus one month."
* 17-May-04 8-K Regulation FD Disclosure
* Effective Duration Gap (months)
o July 2003: 6
o April 2004: 3
* Hussman Funds - Freight Trains and Steep
Curves
"last summer's 5-month ?duration mismatch?
cost Fannie nearly a year of earnings."
Accounting scandal
In late 2004, Fannie Mae was under investigation
for its accounting practices. The Office of Federal Housing Enterprise
Oversight released this September 17, 2004 report alleging widespread
accounting errors, including shifting of losses so senior executives
could earn bonuses from making earnings targets. The difficulty
centered around how to account for various interest rate hedges
Fannie Mae buys as part of its risk management strategy. When Fannie
Mae did not release its third quarter results for 2004, doubts increased.
Supporters of the company, including senior
management, said the problem was merely a disagreement over FASB
accounting standards, but in December, the U.S. Securities and Exchange
Commission ruled that Fannie Mae would have to restate the past
3 1/2 years of earnings, potentially losing $9 billion of earnings
over that timeframe, and possibly necessitating increased capitalization.
This has not yet impacted the stock price for
Fannie Mae, but Moody's and Standard & Poor's have downgraded
Fannie Mae's subordinate debt. Given the large percentage of the
American economy that is tied up in housing values, a major scandal
involving Fannie Mae could be highly damaging to investor confidence.
However, Freddie Mac was able to overcome its summer 2003 scandal
without serious damage.
On December 21, 2004, CEO Franklin Raines and
CFO Timothy Howard were forced to resign. The company also dismissed
its auditor, KPMG.
In testimony given to the U.S. Senate Banking
Committee April 19-21, 2005, it became clear that Congress, with
support from all the parties, was planning to strengthen oversight
of all the GSEs. A contentious issue in the second quarter of 2005
was whether the retained portfolios of Fannie and Freddie should
be reduced. This issue became prominent after an April 26, 2005
AEI symposium, and continued to gain ground leading up to Alan Greenspan's
major May 19, 2005 speech recommending strict portfolio limits.
Management
* Chairman: Stephen B. Ashley
* CEO: Daniel H. (Dan) Mudd
* CFO: Robert J. (Rob) Levin
Analysts
* Moshe Orenbuch (Credit Suisse First Boston)
* Robert Napoli (Piper Jaffray)
* Paul Miller (Friedman, Billings, Ramsey & Co.)
* Matthew Park (A. G. Edwards & Sons, Inc.)
* Bradley Ball (Prudential Financial)
Conference calls
* July 21, 2004 - 2nd Quarter 2004 (presentation)
(audio)
Awards
Fannie Mae received a 71% rating in the 2004
Corporate Equality Index by the Human Rights Campaign. Additionally,
the company gave a $50,000 grant to the anti-LGBT organization Traditional
Values Coalition in 2001 to "to train church leaders to provide
homeownership education in the Greater Los Angeles area."
Fannie Mae was named one of the 100 Best Companies
for Working Mothers in 2004 by Working Mothers magazine
|
