Politics, Not Math, Drive Fannie Mae Earnings

NEW YORK ( TheStreet) -- Fannie Mae ( FNMA) reported a record $7.6 billion profit for the fourth quarter, but the government-owned mortgage guarantor could easily have announced a figure of $66.5 billion.

The $58.9 billion difference consists of a something known to tax geeks as a valuation allowance on deferred tax assets. Essentially these are tax credits Fannie accumulated during several years of multibillion dollar losses while it bore the brunt of the subprime housing crisis.

Accounting rules provide some flexibility regarding when these credits can be counted as income. Much depends upon management estimates of future profits, and we all know those estimates often tend toward the optimistic. Citigroup ( C), for example, took a fair amount of heat from Mike Mayo in 2009, when the well-known analyst argued the bank was too aggressive in its assessment of when it would be able to make use of its tax credits.

But corporate tax consultant Robert Willens, who joined Mayo in criticizing Citigroup for being too aggressive, believes Fannie Mae is erring on the side of caution.

"If it was just purely accounting I think the factors would line up in favor of releasing at least part of the valuation allowance," Willens said.

So why are Fannie Mae executives being so shy?

Probably because many powerful people in Washington would prefer not to draw too much attention to Fannie's profits, nor those of Freddie Mac ( FMCC).

The more money these Government-sponsored enterprises (GSEs) make, the more elected officials have to play with. If the public starts paying attention, however, that becomes more difficult.

Fannie still owes taxpayers $117 billion, a number that hasn't shrunk even though it has paid $35.6 billion in dividends back to the Treasury. When I interviewed former House Financial Services Chairman Barney Frank recently, he thought the debts were in the "hundreds of billions."

But the government officials who keep close tabs on Fannie realize what the numbers truly are. They also know that there is increasing concern that the profits of the GSEs will be used as a private piggy bank. In May, Senator Dianne Feinstein (D-Calif.) proposed using increases in the insurance fee charged by Fannie and Freddie to help "underwater" home owners refinance their mortgages. In December, the House of Representatives voted to use fee increases to pay for a student visa program.

Proposed bipartisan legislation called the "Jumpstart GSE Reform Act," offered last month by Senators Mark Warner, (D-Va.,) David Vitter, (R-La.), Elizabeth Warren (D., Mass.) and Bob Corker (R., Tenn.) intends to address the "piggy bank" issue. It would prevent the use of revenue from increased guarantee fees from being used to offset other government spending.

But let's say your name is Treasury Secretary Jack Lew and you may want to use Fannie and Freddie for some grand idea. Or maybe you just haven't made up your mind yet. You want to make up your mind with as little interference as possible. A $7.6 billion quarterly profit certainly grabs people's attention, but not as much as a $66.5 billion one.

Whatever they may tell you and me, Fannie Mae executives work for Jack Lew. If they report a $66.5 billion profit, it only makes his job more difficult by drawing attention to the fact that there's lots of money coming into the Treasury and he hasn't made up his mind what to do about it yet. So they reported a $7.6 billion profit instead, along with more than $17 billion for all of 2012.

When I suggested that Fannie Mae executives chose not to report a $66.5 billion profit for fear of attracting too much attention, spokesman Pete Bakel did his best to act offended.

"This was an accounting decision. There's no fear in the profits," he said, adding, "we're very proud of the profits we made for 2012."

Bakel and another spokesman, Andrew Wilson, pointed out that Fannie Mae executives have made it clear that could release the valuation allowance as soon as the first quarter."

Could, would and should are all well and good, but as far as politicians are concerned the longer they can delay taking any action on Fannie and Freddie, the better.

To his credit, perhaps, Senator Corker of Tennessee appears to be taking the high road.

The profits of Fannie and Freddie, Corker stated in a press release, are "no excuse for inaction."

There's still lots to decide about the fate of Fannie and Freddie, which is to say the future of housing finance in the United States. Even the debate has barely begun. The increasing profitability of these giants, however, may ultimately force the government's hand.

-- Written by Dan Freed in New York.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

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