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
****DISCLAIMER****
Bob Marcy is not the author of the information provided in this article and is providing it to his website visitors for informational purposes only. Bob is a licensed Realtor and not a legal or financial expert. The information contained in this article should not be used to replace the advice of a trained legal or financial expert.
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