Fannie Mae: Money-Making Winner

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) was the big winner among major U.S. financial names on Tuesday, with shares rising 13% to close at 90 cents.

The government sponsored mortgage giant on Tuesday reported record earnings for the fourth quarter and for all of 2012.

Fannie Mae and its sister company Freddie Mac ( FMCC) were taken under government conservatorship in September 2008, as both companies were in danger of becoming insolvent, with mortgage losses mounting. Fannie's shares popped on March 19 and remained volatile for the rest of that week, after the company announced it had delayed its annual 10-K filing with the Securities and Exchange Commission.

Freddie Mac's shares rose 14% on Tuesday, closing at 87 cents.

While delayed filings often cause shares to take a pounding, Fannie Mae's filing was delayed because Fannie was considering whether or not it could recapture some or all of its $58.9 billion valuation allowance for deferred tax assets, as of Dec. 31. That would go a long way toward repurchasing government-held preferred shares in the company, which were valued at $117.1 billion, as of Dec. 31.

Fannie wound up not recapturing any of the DTA, while reporting net income of $7.6 billion for the fourth quarter and $17.2 billion for all of 2012. Fannie also said it had paid the government $35.6 billion in dividends so far, and expected "to remain profitable for the foreseeable future."

Fannie Mae said its $10.3 billion mortgage putback settlement with Bank of America "led to the recognition of $1.3 billion in pre-tax income for 2012." Looking ahead, the company said it expected to book additional income from the settlement, and that its mortgage repurchase claims against other companies would decline substantially in the first quarter since "outstanding repurchase requests to Bank of America represented 73 percent of Fannie Mae's total repurchase requests outstanding as of December 31, 2012."

When discussing the timing of DTA recapture, Fannie said "the company believes that, after considering all relevant factors, it may release the valuation allowance on its deferred tax assets as early as the first quarter of 2013."

"Accordingly, Fannie Mae expects to pay Treasury a significant dividend in the quarter following a release of the valuation allowance on the company's deferred tax assets," the company said.

Some investors are obviously thinking that with Fannie seemingly primed to repay half of what it owes the government, the now highly profitable company has a chance to go back to operating independently, which would mean its common shares would have real value.

Freddie Mac is in a similar situation, owing the federal government $72.2 billion as of Dec. 31, with a DTA valuation allowance of $31.7 billion. Freddie reported net income of $4.5 billion for the fourth quarter and $11 billion for all of 2012. The company paid the U.S. Treasury dividends totaling $23.8 billion in dividends from 2008 through 2012.

Preferred shares of both mortgage giants have also been quite volatile, since preferred shareholders -- who saw their dividends suspended immediately after the Federal Housing Finance Agency took over Fannie and Freddie in September 2008 -- will be ahead of common shareholders if private investors eventually unlock value from the companies.

For example, Fannie's preferred series E (FNMFM) shares, with a par value of $50.00 and a coupon of 5.10%, rose 23% to close at $8.00. Freddie Mac's preferred series Z (FMCKJ) shares, with a coupon of 5.375% and a par value of $25, rose 15% to close at $3.88.

While being careful not to say that Fannie and Freddie's common and preferred shareholders should walk away empty handed, former Massachusetts Rep. Barney Frank -- who chaired the House Financial Services Committee when the companies were taken under government conservatorship -- said in a recent interview with TheStreet's Dan Freed that he " has little sympathy for the vultures" looking to make a quick killing on the shares.

In an interview with TheStreet's Shanthi Bharatwaj, KBW senior vice president for Washington research Brian Gardner on Monday said the notion among some investors that Fannie and Freddie's non-government preferred shareholders might see their dividends restored, was " pure fantasy."

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

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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.