Fannie Mae Rides The Wave Of U.S. Housing, Books Record Profit
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(Photo credit: futureatlas.com)
The U.S. housing recovery is showing up all over the market these days. Hedge funds made a mint betting on subprime mortgages last year, residential construction companies have kept their months-long rally running in early 2013 and real estate-related companies are lining up to go public.
Tuesday brought the latest dose of good news: an upbeat earnings report from Fannie Mae .
The government-backed mortgage firm said it booked net income of $7.6 billion in the fourth quarter and $17.2 billion for the year. More importantly, for the first time since its 2008 government bailout, Fannie Mae was able to pay down some of the taxpayer rescue without additional borrowing from Uncle Sam.
For the full year, the mortgage firm returned $11.6 billion to government coffers, without drawing down any more of its credit facilities with the Treasury. Compare that with 2011, when it paid $9.6 billion in dividends but drew $25.6 billion, and 2010 when it paid $7.7 billion and drew $15 billion.
Treasury draws and repayments, from Fannie Mae's 2012 earnings release.
Fannie still has a ways to go to pay back the government lifeline that kept it afloat when massive bets on the U.S. housing market turned toxic – of the $116.1 billion it has drawn from the Treasury it has repaid just $31.4 billion – but executives expressed confidence that the housing rebound is for real and will help fuel its turnaround.
“[W]e expect our earnings to remain strong over the next few years, said CEO Timothy Mayopoulos, noting efforts that include more responsible underwriting aimed at preventing a repeat of the 2007-08 blowup.
CFO Susan McFarland said the firm “expects[s] to remain profitable for the foreseeable future and return significant value to taxpayers.”
Steve Schaefer 
The same trends improving the fortunes of Fannie and sister firm Freddie Mac could be less fortuitous down the line if they ultimately bring competition back to the mortgage securitization market. In March, Fannie and Freddie’s regulator moved to sew closer ties between the two, proposing a new joint infrastructure for securitizing mortgages that could ultimately be spun off into a separate vehicle at some later date.
For the past several years, the twin government-sponsored have been pretty much the only game in town, but that hasn’t been a bad thing with the Federal Reserve keeping interest rates low in part by spending billions every month buying agency mortgage-backed securities (backed by loans owned or guaranteed by Fannie and Freddie).
While hedge funds have also capitalized on the trend, mortgage real estate investment trusts have been among the biggest winners from the thirst for yield and relatively limited supply. Investors have snapped up the likes of Annaly Capital Management and American Capital Agency for their fat dividend yields of better than 10%.
Fannie and Freddie may not have the market to themselves forever — American Banker reported Monday on a $300 million offering of residential mortgage-backed securities by a unit of EverBank — but there are plenty of reasons to doubt that the private-label MBS market will come back anytime soon.
Westwood Capital’s Dan Alpert warns that much of the mortgage origination in the U.S. landing at the big banks — in particular the Big 4 ( Bank of America , Citigroup , JPMorgan Chase and Wells Fargo ) — where regulatory requirements under Dodd-Frank provide a disincentive to securitization.
On mortgages, regulators are basically telling banks “you own a portion of this risk, whether you securitize it or not,” Alpert says. From that standpoint, he calls the emergence of a true third-party private-label securities market “extraordinarily unlikely” in the next several years. More likely: banks will continue to hold mortgages on their own books, which implies tighter lending standards will persist and the recovery in the housing market will be constrained.
That may not be the worst thing, given the excesses that led the the bubble bursting five and a half years ago, but Alpert thinks one of the knock-on effects is housing demand from institutional investors masking the fact that shadow inventory is still a significant overhang on the market. When borrowers who aren’t paying a mortgage start renting, they may not rent a unit equivalent to their home, which could make it more difficult for the investment buyers to fill their properties with tenants, Alpert argues.
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