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Fannie Mae: Too Many Risks

NEW YORK (TheStreet) -- Fannie Mae (FNMA) shares are up more than 2,400% since March, boosted by headlines and anticipation that the government-sponsored enterprise will return to more normal operations. That rally is on a baseline low of about 20 cents a share 2010 through 2012.

However, a more detailed look into Fannie's financials, congressional disapproval of Fannie and actions taken by the Treasury with regard to the revised Preferred Stock Purchase Agreement with the Federal Housing Finance Agency of August 2012 should leave common shareholders much less optimistic that FNMA will make a return from here.

Fannie's Financials Are Not Kosher

Starting with Fannie's financials and lack of generally accepted accounting principles as they relate to its third-quarter income statement, investors are presented with a false profit statement of $120 million.

And, of course, with only a scant number of traders bothering to wait for a clear explanation of the financials, headlines about a Fannie revival triggered and a predictable rush into the stock.

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But is Fannie really a wonderful turnaround story?

Behind FNMA's miraculous levitation from the dead, investors will discover an important accounting discrepancy regarding loan reserves -- a falsification of data that can only survive Securities and Exchange Commission scrutiny via special government-sanctioned rule changes specifically to maintain the illusion of a Fannie solvency.

Reviewing Page 5 of Fannie's third quarter 10Q, we see a table that breaks down delinquent mortgages by year of acquisition. It's titled, Table 1: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period. But the language preceding the table is a clever spin on some of the data.

It reads:

"Table 1 below displays information regarding the credit characteristics of the loans in our single-family conventional guaranty book of business as of September 30, 2013 by acquisition period, which illustrates the improvement in the credit risk profile of loans we acquired beginning in 2009 compared with loans we acquired in 2005 through 2008." (emphasis added)
Although Fannie is spinning the "improvement" of its "serious delinquency" rate of mortgages originated after the pre-Lehman 2005 to 2008 period, investors should realize that the 2005 to 2008 delinquent mortgages still represent a whopping 73.2% (exhibit A) of the total mortgages in default.

Instead of feeling warm inside about the improvement in delinquency rates among Fannie's new mortgage originations, the question investors should be asking is: Why are these mortgages still on Fannie's books?

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