Written By: Joel Palmer, Op-Ed Writer
The news from Fannie Mae’s fourth-quarter and full-year results for 2016 was mostly positive. But the mortgage giant’s earnings report released last week indicated that several risks could prevent it from paying future dividends to the U.S. Treasury.
Fannie Mae reported annual net income of $12.3 billion last year, with $5 billion of that generated during the fourth quarter of 2016. Both results are increases from the $11 billion and $3.2 billion earned during the full-year and fourth-quarter of 2015.
The company attributed the positive results to a shift from credit-related income in 2016 from credit-related expense in 2015 driven by a higher benefit for credit losses and lower foreclosed property expense.
The earnings increase was also attributed to lower fair value losses in 2016 compared with the year before.
The company reported a net worth of $6.1 billion as of December 31, 2016, which will result in a $5.5 billion dividend payment to Treasury in March. With that payment, Fannie Mae will have paid close to $160 billion in dividends to Treasury.
But the company’s earnings statement cautioned that it may not be able to pay dividends in the future, and may under some circumstances have to drawn down funds from Treasury.
One of the biggest risks is a proposed reduction in corporate tax rates that was part of President Trump’s campaign.
Under applicable accounting standards, a significant reduction in the U.S. corporate income tax rate would require the company to record a substantial reduction in the value of its deferred tax assets in the quarter in which the legislation is enacted.” Lower tax rates, Fannie Mae says, would likely result in a net loss and net worth deficit, which would require an infusion of funds from Treasury.
Another area of concern is the credit risk on the company’s current book of business.
Fannie Mae tightened mortgage underwriting and eligibility standards following the 2008-2009 housing crisis. However, 12 percent of its single-family conventional guaranty book of business consists of loans acquired before the new standards took effect. Another 16 percent of its portfolio consist of Refi Plus loans that originated prior to 2009.
And Fannie Mae still has loans it acquired prior to the housing crisis that expose the company to greater risk, including Alt-A loans (3 percent of its single-family conventional book), interest-only loans (2 percent), and loans with FICO credit scores at origination of under 620 (2 percent).
Fannie also cites the risk of its current conservatorship arrangement with the U.S. Treasury. The Treasury took Fannie and Freddie into conservatorship in 2008 after they suffered heavy losses from mortgage investments.
The agreements with Treasury limit how much of its net worth Fannie Mae can retain, an amount that falls to zero in 2018. Fannie is also unable to “rebuild our capital position or pay dividends or other distributions to stockholders other than Treasury. Our senior preferred stock purchase agreement with Treasury also includes covenants that significantly restrict our business activities.” These provisions leave Fannie Mae vulnerable to a future downturn.
About the Author
As an NAMP® Opinion Editorial Contributor, Joel Palmer is a freelance writer who spent 10 years as a business and financial reporter and another 10 years in marketing for the insurance and financial services industries. He regularly writes about the mortgage industry, as well as residential and commercial real estate, investments, and retirement income planning. He has also ghostwritten books on starting a business, marketing, and retirement income planning.