Fannie Mae (US OTC: FNMA) Books Profits For The First Time Since The Dawn Of Man!
Government-backed mortgage finance firm Fannie Mae managed to turn a profit in the first quarter, one that was large enough to cover the dividends it must pay to the government in return for being kept afloat with taxpayer dollars.
Fannie, along with sister firm Freddie Mac, was put into conservatorship by the federal government at the height of the financial crisis in 2008, and has been steadily infused with cash since. The first quarter represents a milestone of sorts though, with the mortgage firm recording net income of $2.7 billion. That marks a sharp turnaround from a $2.4 billion loss last quarter and a $6.5 billion loss in the first quarter of 2011.
Most importantly, comprehensive net income of $3.1 billion means Fannie can cover its first-quarter dividend of $2.8 billion, and for the first time in recent memory the firm did not request an additional draw from the Treasury. After the fourth quarter, Fannie requested another $4.6 billion to fill its net worth deficit. Freddie Mac actually recorded positive net income in the fourth quarter, but still needed $146 million to erase its year-end deficit.
Fannie’s total loss reserves declined to $74.6 billion as of March 31, from $76.9 billion at the end of 2011. Those reserves are largely earmarked to cover the legacy book of business made of up bubble-era mortgages that drove Fannie and Freddie into their weakened state.
Despite their condition, the two government-sponsored enterprises have been the last bastion of hope for the mortgage market in recent years. “In tandem, we continue to be the primary source of funding in the mortgage market and our new book of business is growing, profitable, and built on strong lending standards,” said departing CEO Michael Williams.
Shares of Fannie and Freddie, once coveted for their seemingly-bulletproof dividends and the implied government guarantee standing behind the firms, now change hands over-the-counter for about a quarter apiece.
Other plays on the mortgage market are far more interesting though, including mortgage REITs like Annaly Capital Management and American Capital Agency Corp. Like more traditional real estate investment trusts, the mREITs receive favorable tax treatment in return for paying out the vast majority of their income to shareholders, but they generate that income by investing in mortgage-backed securities.
Barclays Capital analyst Mark DeVries noted in a recent interview that the mREITs, which offer rich dividend yields currently in the mid-teens, can remain attractive as long as their funding costs are low, a condition that seems likely to remain in place for some time given the Federal Reserve’s ongoing zero interest-rate policy.
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