Fannie Mae Earnings Slip

Losses on its derivatives portfolio and lower interest income cut profits.
Publish date:

Updated from 8:01 a.m. EDT

Fannie Mae's


first-quarter earnings slipped from a year ago, as declining interest income from home loans and valuation losses on its derivatives portfolio offset a big increase in fees received for putting together mortgage bonds.

The company risked raising more eyebrows on Wall Street and in Washington Monday by

not including shareholder equity numbers or a copy of its balance sheet with the earnings report..

Janis Smith, a Fannie Mae spokeswoman, says from now on the company will file its balance sheet with its 10-Q quarterly reports. She said Fannie Mae wasn't trying to hide anything by keeping the balance sheet out of its earnings release. Fannie Mae will file its 10-Q for the quarter on May 10.

The mortgage company said it earned $1.90 billion, or $1.90 a share, in the latest quarter, compared with earnings of $1.94 billion, or $1.93 a share, last year.

Excluding markdowns on the book of derivatives it uses to hedge its mortgage holdings, Fannie's earnings rose to $2.02 billion, or $2.03 a share, from $1.85 billion, or $1.84 a share, last year. On the latter basis, analysts surveyed by Thomson First Call were forecasting earnings of $1.91 a share in the most recent quarter.

The stock was down 56 cents to $73.65 in early trading.

Meanwhile, the Washington, D.C.-based company reported a 7.6% decline in its mortgage portfolio on an annualized basis. The company said its opportunities to purchase mortgages were constrained by "unusually narrow mortgage-to-debt spreads'' and "aggressive purchasing of mortgage assets by other investors.'' Fannie Mae said it expects that trend to reverse later this year, as other investors become mortgage sellers as mortgage spreads widen.

Fannie Mae was established by Congress to make a secondary market in home loans, buying them en masse from banks so that banks would have fresh cash to lend. It has become an immensely profitable enterprise because of its ability to finance its mortgage purchases at lower rates than banks charge their own borrowers, and also collects big "guaranty" fees when it pools the loans in mortgage-backed securities.

But for the past several years, Fannie Mae and its corporate sibling

Freddie Mac


have been the subject of much controversy on Capitol Hill over their bookkeeping and increasing use of leverage to run their businesses. Politicians and regulators have been debating whether to stiffen the operating guidelines for the two mortgage giants.

In the latest quarter, net interest income fell 5.1% to $3.20 billion, reflecting the lower interest rates banks have been forced to charge in a fiercely competitive lending market. Fannie's reported net interest yield, or the difference between its cost and money and the interest it collects from home owners, declined 20 basis points to 1.4% in the first quarter compared with a year ago.

The main drag on first-quarter reported earnings was a $959 million charge related to the revaluation of its options portfolio in the quarter. Fannie owns a huge portfolio of derivative instruments to protect against big swings in the value of its mortgages, and is forced to mark the derivatives to their market value each quarter. The company took a similar charge of $624.6 million in the year-ago period.

Excluding the options math, Fannie's "core" earnings rose 9.2% in the first quarter from a year ago, as the company saw its loss from calling and buying back debt fall by $365.5 million and fees from manufacturing mortgage bonds shoot up 34.8%.