Fannie Mae's first-quarter pre-tax net income was $8.1 billion, increasing from $7.6 billion in the fourth quarter and $5.4 billion in the first quarter of 2012. The company's first-quarter earnings were boosted by $800 million before taxes from the settlement of a long-term dispute with Bank of America ( BAC). The Bank agreed to pay Fannie $3.6 billion in cash and pay roughly $6.75 billion to repurchase about 30,000 mortgage loans. Illustrating the importance of the settlement, Fannie added that Bank of America's share of Fannie's total mortgage repurchase claims against lenders declined "to 10 percent of its total repurchase requests outstanding as of March 31, 2013, compared with 73 percent of Fannie Mae's total repurchase requests outstanding as of December 31, 2012." Freddie Mac on Wednesday reported a first-quarter profit of $4.6 billion and announced it would pay a $7.0 billion dividend to the government. Freddie did not recapture any of its $30.1 billion DTA, but when it does, there will be an extraordinary dividend payment to the Treasury. Freddie has paid or announced $36.6 billion in dividends on government-held senior preferred shares so far.
How Much Is Enough, and What About the Junior Preferred?No matter how much in dividends the GSEs managed to pay the government, there is no mechanism in place for either to repurchase any of the senior preferred shares held by the Treasury. Meanwhile, investors holding the GSEs junior preferred shares have had their dividends suspended since September 2008. Judging from the market action, it seems that investors expect to realize value from the preferred shares, either from a restored dividend, or maybe from some sort of payout if and when President Obama and Congress come to an agreement for the GSEs ultimate structure. Fannie's preferred series E shares, with a coupon of 5.10% and a par value of $50.00, closed at $9.00 on Thursday, rising over 16% for the session and nearly sixfold from $1.60 at the end of 2012.
Freddie's preferred series Z shares, with a coupon of 5.375% and a par value of $25.00, were up 7.5% on Thursday to close at $5.05. The Freddie preferred series Z shares have risen 186% from $1.75 at the end of last year. To illustrate just how lucrative speculative investments in GSE junior preferred shares might be, consider the potential yields if the dividends are restored. Fannie's preferred series E shares are supposed to pay annual dividends of $2.25 a share. If the dividend were restored, an investor who went in at Thursday's close would see a dividend yield of 25.00%. The Freddie preferred series Z shares are supposed to pay annual dividends of $1.34 a share. If the full dividend were restored, an investor who purchased the shares at Thursday's close would be looking at a dividend yield of 26.53%. Fannie's common shares were down 3% to close at 87 cents, while Freddie's common shares declined 4% to close at 85 cents.
-- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn