Federal National Mortgage Association
Type: Public
Founded: 1938
Location: Washington, DC
Key people: Daniel Mudd, Chief Exec. Officer, Exec. VP
Industry: Credit Services
Products: Financial Services
Revenue: $53.8 billion (2003)
Employees: 5,055
Website: www.fanniemae.com
The Federal National Mortgage Association (FNMA; NYSE:
FNM), commonly known as Fannie Mae, is a United States
Government-sponsored corporation created in 1938 to establish
a secondary market for mortgages insured by the Federal
Housing Administration (FHA). Fannie Mae buys mortgages
on the secondary market, pools them and sells them as
mortgage-backed securities to investors on the open market.
This secondary mortgage market helps to replenish the
supply of lendable money for mortgages and ensures that
money continues to be available for new home purchases.
The name "Fannie Mae" is a creative acronym-portmanteau
of the company's full name that has been adopted officially
for ease of identification.
History
In 1968, the Federal National Mortgage Association was
partitioned into two separate entities—one wholly
owned by the government and known as the Government National
Mortgage Association (Ginnie Mae), and the other to retain
the name Federal National Mortgage Association (Fannie
Mae). At this time, Fannie Mae expanded its charter to
buying other sorts of mortgages besides the government-insured
ones it had traditionally purchased. Fannie Mae became
fully private in 1970 [1].
Business
Fannie Mae is a consistently profitable corporation.
While it receives no direct government funding or backing,
it has certain looser restrictions placed on its activities
than normal financial institutions. For example, it is
allowed to sell mortgage backed securities with half the
capital backing them up than is required by other financial
institutions. Critics, including Alan Greenspan, say that
this is only allowed because investors seem to think that
there is a hidden, or implied, guarantee to the bonds
that Fannie Mae sells ([2]). Although the company describes
them as having no guarantee, nevertheless the vast majority
of investors believe that the Government would prevent
them from defaulting on their debt, and so buy bonds at
very low interest rates as compared to others having like
risk.
The largest mortgage originator in the United States
is Countrywide Financial, which is an almost exclusive
Fannie Mae partner, although they have sold small amounts
to government sponsored enterprise (GSE) competitors.
Their "loan production" during 2003 was $434.9
billion, of which most was sold to Fannie Mae.
While Mortgage Originators can securitize and sell the
mortgages themselves, GSEs can leverage their balance
sheet further, receive lower rates on both assets and
liabilities, and have a record of packaging and selling
mortgages with greater success.
Conforming loans
Because of its stake in the mortgage market and because
of its history, Fannie Mae (along with Freddie Mac) sets
the limit each year on the size of a conforming loan based
on the October to October changes in mean home price,
above which a mortgage is considered a jumbo loan, and
has higher rates associated with it. This is because both
Fannie Mae and Freddie Mac only buy loans that are conforming,
to repackage into the secondary market, making the demand
for non-conforming loans much less. By virtue of the laws
of supply and demand, then, it is harder for lenders to
sell the loans, thus it would cost more to the consumers
(typically 1/4 to 1/2 of a percent.) The conforming loan
limit is 50 percent higher in Alaska, Hawaii, Guam and
the US Virgin Islands.
Financials
FNMA is a financial corporation which uses derivatives
to "hedge" their cash flow. Derivative products
they use include interest rate swaps and options to enter
interest rate swaps ("pay-fixed swaps", "receive-fixed
swaps", "basis swaps", "caps and swaptions",
"forward starting swaps"). Here's a guide through
some of its financials and accounting.
* Article about its accounting: Barron's: Fannie Mae
faces more income issues - Banks - Financial - Real Estate
- Financial Services - General
* SEC filings: SEC - Company Information SEC EDGAR -
10-K 2003 (EDGAR Online) (FNM: SEC Filings for FANNIE
MAE - Yahoo! Finance) (Investor Relations: SEC Filings)
"transfer negative numbers to its balance sheet
under "accumulated other comprehensive income,"
or AOCI." (Page 123 - "Balance Sheets"
- "Stockholders? Equity" - "Accumulated
other comprehensive loss") ([3])
"2002 earnings of $6.4 billion would have been overwhelmed
by $8.9 billion in cash-flow hedging losses." (Page
124 - "Accumulated Other Comprehensive Income (Loss)"
- "Net cash flow hedging losses on derivatives hedging
debt").
"$3 billion in losses that were recognized in 2002-2003"
(Page 122 - "Statements of Income" - "Other
expenses" - "Debt extinguishments, net").
"$19 billion paid to settle underwater interest-rate
swaps in those years." (Page 125 - "Cash-Flows"
- "Cash flows from (used in) financing activities"
- "Net payments to purchase or settle hedge instruments").
"interest rate swaps on its books rose from $23
billion in 2002 to $149 billion in 2003." (Page 79
- Table 30 "Cash flow hedges" - "Receive-fixed
swaps").
"exclude its AOCI numbers from the calculations
of capital" (Page 158 - "Core capital"
is "Stockholders' Equity" excluding AOCI).
Duration gap
Main article: duration gap
* UPDATE - Fannie Mae average duration gap widens in
April
"The company said that in April its average duration
gap widened to plus 3 months in April from zero in March."
"The Washington-based company aims to keep its duration
gap between minus 6 months to plus 6 months. From September
2003 to March, the gap has run between plus to minus one
month."
* 17-May-04 8-K Regulation FD Disclosure
* Effective Duration Gap (months)
o July 2003: 6
o April 2004: 3
* Hussman Funds - Freight Trains and Steep Curves
"last summer's 5-month ?duration mismatch? cost
Fannie nearly a year of earnings."
Accounting scandal
In late 2004, Fannie Mae was under investigation for
its accounting practices. The Office of Federal Housing
Enterprise Oversight released this September 17, 2004
report alleging widespread accounting errors, including
shifting of losses so senior executives could earn bonuses
from making earnings targets. The difficulty centered
around how to account for various interest rate hedges
Fannie Mae buys as part of its risk management strategy.
When Fannie Mae did not release its third quarter results
for 2004, doubts increased.
Supporters of the company, including senior management,
said the problem was merely a disagreement over FASB accounting
standards, but in December, the U.S. Securities and Exchange
Commission ruled that Fannie Mae would have to restate
the past 3 1/2 years of earnings, potentially losing $9
billion of earnings over that timeframe, and possibly
necessitating increased capitalization.
This has not yet impacted the stock price for Fannie
Mae, but Moody's and Standard & Poor's have downgraded
Fannie Mae's subordinate debt. Given the large percentage
of the American economy that is tied up in housing values,
a major scandal involving Fannie Mae could be highly damaging
to investor confidence. However, Freddie Mac was able
to overcome its summer 2003 scandal without serious damage.
On December 21, 2004, CEO Franklin Raines and CFO Timothy
Howard were forced to resign. The company also dismissed
its auditor, KPMG.
In testimony given to the U.S. Senate Banking Committee
April 19-21, 2005, it became clear that Congress, with
support from all the parties, was planning to strengthen
oversight of all the GSEs. A contentious issue in the
second quarter of 2005 was whether the retained portfolios
of Fannie and Freddie should be reduced. This issue became
prominent after an April 26, 2005 AEI symposium, and continued
to gain ground leading up to Alan Greenspan's major May
19, 2005 speech recommending strict portfolio limits.
Management
* Chairman: Stephen B. Ashley
* CEO: Daniel H. (Dan) Mudd
* CFO: Robert J. (Rob) Levin
Analysts
* Moshe Orenbuch (Credit Suisse First Boston)
* Robert Napoli (Piper Jaffray)
* Paul Miller (Friedman, Billings, Ramsey & Co.)
* Matthew Park (A. G. Edwards & Sons, Inc.)
* Bradley Ball (Prudential Financial)
Conference calls
* July 21, 2004 - 2nd Quarter 2004 (presentation) (audio)
Awards
Fannie Mae received a 71% rating in the 2004 Corporate
Equality Index by the Human Rights Campaign. Additionally,
the company gave a $50,000 grant to the anti-LGBT organization
Traditional Values Coalition in 2001 to "to train
church leaders to provide homeownership education in the
Greater Los Angeles area."
Fannie Mae was named one of the 100 Best Companies for
Working Mothers in 2004 by Working Mothers magazine
