Fannie Mae Turns a Profit for First Time in Three Years

""Fannie Mae"":http://www.fanniemae.com has released its fourth-quarter and full-year 2010 earnings results. The GSE reported net income of $73 million for the last three months of 2010, compared to a net loss of $1.3 billion in the third quarter. It's the first time the company's been in the black in over three years.

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For the full year of 2010, Fannie Mae recorded a net loss of $14 billion, compared with a loss of $72 billion for 2009.

Fannie's sibling mortgage financing company, ""Freddie Mac, reported"":http://dsnews.comarticles/freddie-mac-needs-500m-from-taxpayers-after-q4-loss-2011-02-24 an identical $14 billion loss for the 2010 fiscal year and a $113 million loss for the fourth quarter. Freddie's Q4 shortfall was its smallest of the year.

Both GSEs have succeeded in significantly narrowing losses just as the administration is stepping up debate on how to unwind and replace the two mortgage giants.

Fannie Mae says its fourth-quarter change to positive territory resulted from a decline in the company's credit-related expenses and the successful resolution of outstanding repurchase claims.

Still, after a hefty $2.2 billion fourth-quarter dividend payment to the U.S. Treasury on stock the GSE turned over to the government in return for bailout money, Fannie Mae had a net worth deficit of $2.5 billion as of the end of last year.

The company's regulator, the ""Federal Housing Finance Agency"":http://www.fhfa.gov (FHFA) has requested $2.6 billion in taxpayer dollars from Treasury to cover the net worth deficit, more than 80 percent of which is directly attributed to the dividend payment to Treasury.

Upon receiving those funds, Fannie Mae will have drawn a total of $91.2 billion in taxpayer support since placed into conservatorship in September 2008. Of this money, $10.2 billion has been sent directly back to Treasury to pay stock dividends.

Fannie Mae said in its latest earnings announcement that the company is building a strong new book of business and expects that new loans acquired since January 2009 to be profitable over their life cycle.

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Conventional single-family loans added to Fannie Mae’s book of business in 2009 and 2010 had a weighted average loan-to-value ratio at origination of 68 percent and a weighted average credit score at origination of 762.

Fannie Mae says these loans have a stronger profile partly because the company changed its underwriting guidelines to more accurately reflect risk in the housing market and to significantly reduce acquisitions of higher-risk loans. The changes include a higher minimum FICO credit score and reduced maximum debt-to-income ratio for most loans, a national minimum down payment policy, increases in the company’s guaranty fee pricing structure to align with risk, and new appraisal policies.

Fannie Mae reserved for or realized approximately $110 billion of losses on its single-family loans over the past two years. Most of these losses are attributable to loans purchased or guaranteed from 2005 through 2008.

Fannie Mae’s single-family serious delinquency rate decreased to 4.48 percent as of December 31, 2010, from 4.56 percent as of September 30, 2010, and from 5.38 percent as of December 31, 2009.

The company says it is working to mitigate losses on its legacy book of business by focusing on reducing defaults, pursuing home retention solutions and foreclosure alternatives, and pursuing contractual remedies from lenders in the form of loan buybacks.

According to the GSE’s report, during 2010, Fannie Mae completed more than 515,000 single-family loan workouts, including over 440,000 home retention solutions (modifications, repayment plans, and forbearances). In the fourth quarter of 2010, the company completed home retention solutions for approximately 90,000 loans with an aggregate unpaid principal balance of $18 billion.

During 2010, Fannie Mae guaranteed or purchased an estimated $856 billion in loans, which includes approximately $217 billion in delinquent loans purchased from its single-family mortgage-backed securities (MBS) trusts.

The company purchases loans out of MBS trusts and takes them on its balance sheet to improve its funding costs and to allow the company to pursue loss mitigation solutions like modifications to minimize potential losses on these loans. As a result of these purchases, Fannie Mae reduced the level of loans in MBS trusts that were delinquent by four or more months from $127 billion to $8 billion as of year-end.

Fannie Mae continued to be the largest single issuer of mortgage-related securities in the secondary market in 2010, with an estimated 44 percent market share of new single-family mortgage bonds.