Shares of Federal National Mortgage Association FNMA or Fannie Mae declined marginally after it reported third-quarter 2015 net income of $2.0 billion, down 49.8% year over year. The huge earnings decline led to negative market sentiment despite the government backed mortgage financier delivering its 15th consecutive quarterly profit.
Results were adversely impacted by lower net revenue and elevated expenses, partly offset by a rise in credit related income. Further, improvement in credit quality and a strong liquidity position continued to be the positives during the quarter.
Behind the Headlines
Fannie Mae’s net revenue came in at $5.8 billion, down 2.7% year over year. The decline was driven by a fall in fee and other income, partly offset by a rise in net interest income.
Total credit-related income increased 26.0% year over year to $1.1 billion. The rise was due to higher benefit for credit losses, partly offset by higher foreclosed property expense. Moreover, net investment gains climbed 74.9% from the year-ago quarter to $299 million.
Expenses totaled $2.1 billion, rising 49.9% from the prior-year quarter. The significant rise was driven by an increase in all the components of expenses.
Fannie Mae provided approximately $132 billion in liquidity to the mortgage market in the reported quarter, enabling families to buy, refinance, or rent homes.
Further, Fannie Mae completed more than 22,000 loan modifications in the reported quarter.
As of Sep 30, 2015, Fannie Mae’s total loss reserves declined 24.5% year over year to $30.0 billion. Further, as of Sep 30, 2015, allowance for loan losses totaled $29.1 billion, down 18.0% as of Dec 31, 2014.
As of Sep 30, 2015, cash and cash equivalents summed $19.9 billion compared with $22.0 billion as of Dec 31, 2014. Further, total mortgage loans amounted to $3.02 trillion, almost at par with the Dec 31, 2014 level.
Additionally, Fannie Mae will pay taxpayers $2.2 billion as dividends in December 2015. Following this payment, the company will have paid a total of approximately $144.8 billion as dividends to Treasury. As of Sep 30, 2015, senior preferred stock outstanding and held by Treasury was $117.6 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 expected to remain under pressure due to the complex, cyclical and sensitive (to mortgage rates as well as house prices) nature of the mortgage industry.
Fannie Mae currently carries a Zacks Rank #3 (Hold). Some better-ranked companies in the same sector include Orchid Island Capital, Inc. ORC, Federal Home Loan Mortgage Corporation FMCC and PennyMac Financial Services, Inc. PFSI. All these stocks hold a Zacks Rank #2 (Buy).
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