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Fannie Mae Pops on Possible Government Payback (Update 1)

Updated from 12:44 p.m. EST with afternoon market action for Fannie and Freddie, and information on both companies' preferred shares.

NEW YORK ( TheStreet) -- Shares of Fannie Mae (FNMA) are popping following a report the company is trying to use an accounting adjustment to repay billions in bailout money to the federal government.

The shares were up 43% in afternoon trading, to 75 cents, after a report in the Wall Street Journal brought attention to a filing by Fannie Mae on Thursday, saying the company would delay filing its annual 10-K report with the Securities and Exchange Commission.

Fannie said it would delay the annual report because the company needed extra time to analyze whether or not it could recapture some of its $64.1 billion valuation allowance for deferred tax assets (DTA), as of Dec. 31.

Fannie Mae and its sister mortgage giant Freddie Mac (FMCC) were taken under government conservatorship by the Federal Housing Finance Agency in September 2008. As of Sept. 30, the government had $116.1 billion in preferred Fannie Mae shares, and Fannie had paid the Treasury $28.5 billion in dividends.

"We expect to report significant net income for the three months and the year ended December 31, 2012, compared with a net loss of $2.4 billion for the three months ended December 31, 2011 and a net loss of $16.9 billion for the year ended December 31, 2011," Fannie said in the filing, even if it is unable to begin recapturing the DTA.

Fannie reported a third-quarter profit of $1.8 billion. That was the company's third consecutive profit. Earnings for the first three quarters of 2012 were $9.7 billion, compared to a net loss of $14.4 billion during the first three quarters of 2011. The company was also able to pay its third-quarter dividend of $2.9 billion in the Treasury's preferred shares, without resorting to further government borrowings.

The massive size of the DTA is reflected in the market's reaction and would go a long way to rehabilitate the company by drastically lowering its dividend expenses, possibly making Fannie Mae's common stock a viable long-term investment.

Freddie Mac's shares were even stronger than Fannie's, up 43% in afternoon trading, to 54 cents.

Preferred shares of Fannie Mae and Freddie Mac -- left for dead by some investors last year -- were also seeing plenty of interest from investors. Fannie's preferred series E shares, with a coupon of 5.10% and a par value of $50.00, were up over 4% to $5.20. Freddie's preferred series Z shares, with a coupon of 5.375% and a par value of $50.00, were up over 7% to $3.12.

Both Freddie and Fannie suspended dividend payments on all preferred shares -- save those held by the Treasury -- after the companies were taken under FHFA conservatorship.

With Fannie and Freddie continuing to dominate the secondary market for mortgage loans in the U.S., House Financial Services Committee Chairman Jeb Hensarling (R., Texas) on Tuesday said in a statement before FHFA Chairman Edward DeMarco was due to testify in front of the committee that "I am determined that this hearing will be the last time that Director DeMarco, or if you believe press reports, his successor, will testify before this Committee before we finally and belatedly markup true GSE reform legislation." The GSE, or government-sponsored enterprises, include Fannie and Freddie, as well as smaller agencies, such as Ginnie Mae.

In his prepared testimony, DeMarco said "few of us could have imagined in 2008 that we would be approaching the fifth anniversary of placing Fannie Mae and Freddie Mac in conservatorships and have made little meaningful progress to bring these government conservatorships to an end."

The idea of the conservatorship was to provide a "time out," in order for "Congress and the Administration could figure out how best to address future reforms to the housing finance system," DeMarco said.

So the fate of Fannie and Freddie and the government-dominated mortgage finance system in the United States is still up in the air, and common stock investors need to be careful. Hensarling said that designing a "sustainable" housing finance system "is a heavy lift in a divided government," and made clear he was looking to "abolish Fannie Mae and Freddie Mac as government-sponsored enterprises."

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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