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Fannie Mae Q4 Earnings Dismal; 2013 Impressive

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Federal National Mortgage Association or Fannie Mae reported fourth-quarter 2013 net income of $6.5 billion, down 26% from $8.7 billion earned in the prior quarter. However, this was the company’s eighth consecutive quarterly profit.
Results were adversely impacted by lower investment income, partially offset by growth in revenues and credit-related income and lower expenses. The quarterly tailwinds consisted of an improving credit quality and stable liquidity position.

For full-year 2013, Fannie Mae’ net income grew significantly from $17.2 billion in 2012 to $84.0 billion. Higher home prices and the resolution of several representation and warranty as well as servicing matters with major banks including Bank of America Corporation (BAC - Free Report) , JPMorgan Chase & Co. (JPM - Free Report) and Wells Fargo & Co. (WFC - Free Report) were the primary factors behind the strong performance.

Behind the Headlines

Fannie Mae’ net revenue in the reported quarter came in at $7.0 billion, growing 11.0% from the last quarter. The rise was driven by increase in fee and other income, partially offset by lower net interest income.

Total credit-related income was $1.1 billion, down 71% sequentially. The fall was due to absence of benefit for credit losses and lower foreclosed property income. However, net investment gains declined 79% from the last quarter to $135 million.

Administrative and other non-interest expenses totaled $869 million, down 9% from $954 million in the prior quarter.

Credit losses, defined by the company as net charge-offs plus foreclosed property expense, net of the effect of certain fair-value losses, were $260 million, down from $1.1 billion in the previous quarter. Further, as of Dec 31, 2013, Fannie Mae’s total loss reserves decreased 2% sequentially to $47.3 billion.

Since Jan 2009 through Dec 2013, Fannie Mae provided nearly $4.1 trillion in liquidity to the mortgage market through its purchases and guarantees of loans. This enabled borrowers to complete 12.3 million mortgage refinancings and 3.7 million home purchases, while the bank provided financing for 2.2 million units of multifamily housing.

Further, Fannie Mae completed more than 39,000 loan modifications in the said quarter and 160,000 for the full year. This brought the total number of loan modifications completed by the company to approximately 1 million since Jan 2009.

As of Dec 31, 2013, cash and cash equivalents were $48.3 billion compared with $89.0 billion as of Dec 31, 2012. Further, total mortgage loans were $3.03 trillion, up from $2.95 trillion as of Dec 31, 2012.

Additionally, Fannie Mae will pay taxpayers $7.2 billion as dividends in the first quarter of 2014. Following this payment, the company will have paid a total of approximately $121 billion as dividends to Treasury. As of Dec 31, 2013, senior preferred stock outstanding and held by Treasury was $117.1 billion.

Our Viewpoint

Fannie Mae continues to support the housing recovery. Moreover, it is expected to contribute toward building a sustainable housing finance system. While the company anticipates its annual earnings to remain strong over the next few years (though not reaching 2013-levels), any decline in interest rates or home prices could dent its performance going forward.

Fannie Mae currently carries a Zacks Rank #3 (Hold).

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