Fannie Mae managed to avoid the same fate that befell Freddie Mac in the first quarter. Whereas Freddie Mac reported a net loss of $354 million—the second time in the last three quarters that Freddie Mac has lost at least that much—Fannie Mae reported a net income of $1.1 billion for Q1 and a positive net worth of $2.1 billion as of March 31, 2016.
The loss for Freddie Mac in Q1 was due mostly to the effect of declining net interest rates, which resulted in an after-tax fair value loss of $1.4 billion; and the use of derivatives, which Freddie Mac uses as a hedge against changes in interest rates. The value of interest rate derivatives can fluctuate dramatically, however; Fannie Mae relies more on issuance of longer-term debt in order to protect itself against interest rate changes.
“It doesn't mean that there is anything wrong with doing a derivatives strategy,” said Steve Williams, principal with Cornerstone Advisors. “It's very prudent to do so. I don't think that Freddie Mac is the only one that was planning for rising rates by this time, which is almost halfway through 2016. We've actually seen rates go down, and that's that surprising sluggishness in our economy and worries about a global slowdown.”
The declining longer-term interest rates had a negative effect on Fannie Mae’s Q1 earnings even though it turned a profit; the $1.1 billion net income for Fannie Mae in Q1 was less than half of its Q4 2015 net income of $2.5 billion and a decline of more than half a billion year-over-year (from $1.9 billion in Q1 2015).
“We continue to run our business well while supporting the improving housing market,” said Timothy J. Mayopoulos, president and CEO of Fannie Mae. “The changes we have made to the company have put us in a stronger position to fulfill our responsibility to deliver safe, affordable mortgage financing for our customers, in all markets at all times. We will continue to execute on behalf of our partners, drive further improvements to housing finance and our company, and serve those who house America.”
Freddie Mac’s huge loss for Q1 did not necessitate a draw on Treasury, but at the same time, Freddie Mac will not be making a dividend payment to Treasury in Q2. Fannie Mae announced it will pay $919 million in dividends to Treasury for Q2, bringing the total paid to Treasury since 2008—about $32 billion more than the $116 billion bailout Fannie Mae required in 2008 to avoid insolvency.
Click here to view Fannie Mae’s complete financial results for Q1.