Shares of Federal National Mortgage Association (FNMA) or Fannie Mae fell 3.45% after it reported third-quarter 2014 net income of $3.9 billion, down 55.2% year over year. The huge earnings decline led to negative market sentiment despite the government backed mortgage financier delivering its 11th consecutive quarterly profit.
Results were adversely impacted by lower net revenue as well as credit related income. Moreover, elevated expenses further dragged the results downward. Nevertheless, improvement in credit quality and strong liquidity position continued to be the positives during the quarter.
Behind the Headlines
Fannie Mae’s net revenue came in at $6 billion, down 4.8% year over year. The decline was driven by a fall in net interest income.
Total credit-related income decreased 77.8% year over year to $0.8 billion. The fall was due to lower benefit for credit losses as well as foreclosed property expense. Moreover, net investment gains declined 72.7% from the year-ago quarter to $177 million.
Expenses totaled $1.4 billion compared with income of $119 million in the prior-year quarter. The significant fall was impacted by an increase in most components of expenses.
Since Jan 2009 through Sep 2014, Fannie Mae provided more than $4.3 trillion in liquidity to the mortgage market through its purchases and guarantees of loans. This enabled borrowers to complete the refinancing of 13 million mortgages and 4.3 million home purchases, while the bank provided financing for 2.5 million units of multifamily housing.
Further, Fannie Mae completed about 29,000 loan modifications in the reported quarter. This brought the total number of loan modifications completed by the company to more than 1.1 million since Jan 2009.
As of Sep 30, 2014, Fannie Mae’s total loss reserves declined 17.3% year over year to $39.7 billion. Further, as of Sep 30, 2014, allowance for loan losses totaled $36.9 billion, down 15.8% as of Dec 31, 2013.
As of Sep 30, 2014, cash and cash equivalents summed $16.3 billion compared with $19.2 billion as of Dec 31, 2013. Further, total mortgage loans amounted to $3.01 trillion, down marginally from $3.03 trillion as of Dec 31, 2013.
Additionally, Fannie Mae will pay taxpayers $4 billion as dividends in Dec 2014. Following this payment, the company will have paid a total of approximately $134.5 billion as dividends to Treasury. As of Sep 30, 2014, senior preferred stock outstanding and held by Treasury was $117.1 billion.
Our Viewpoint
Though Fannie Mae suffered losses during the crisis of 2008–2009 and had to be bailed out by the government, it managed to turn itself into a profitable organization supported by a stable recovery in the housing market.
However, the mortgage lender’s profitability is bearing the brunt of subsiding refinancing demand propelled by higher interest rates since 2013. Going forward, the pressure on top line will mount given the backtracking housing recovery.
Fannie Mae currently carries a Zacks Rank #3 (Hold).
Competitive Landscape
Federal Home Loan Mortgage Corporation (FMCC) or Freddie Mac’s third-quarter 2014 results reflected its 12th consecutive quarter of positive earnings with net income of $2.1 billion, up from $1.4 billion in the prior quarter. Results were positively driven by higher income from legal settlements associated with private label securities (PLS) and reduced derivative losses.
Some companies in the same sector worth considering include Home Loan Servicing Solutions, Ltd. (HLSS) and PennyMac Financial Services, Inc. (PFSI). Both carry a Zacks Rank #2 (Buy).
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