Fannie Mae Falls on Y/Y Earnings Decline and Soft Housing - Analyst Blog

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Shares of Federal National Mortgage Association ( FNMA ) or Fannie Mae fell 1.5% after it reported second-quarter 2014 net income of $3.7 billion, down 63.7% year over year. The huge earnings decline led to negative market sentiment despite the government backed mortgage financier delivering 10th consecutive quarterly profit.

Results were adversely impacted by lower net revenue as well as credit related income. Moreover, elevated expenses further dragged the results downward. Nevertheless, improvement in credit quality and strong liquidity position continued to be the positives during the quarter.

Behind the Headlines

Fannie Mae's net revenue came in at $5.3 billion, down 14.1% year over year. The decline was driven by a fall in fee and other income as well as net interest income.

Total credit-related income decreased 67.6% year over year to $1.9 billion. The fall was due to lower benefit for credit losses as well as foreclosed property income. However, net investment gains climbed 74.5% from the year-ago quarter to $506 million.

Expenses totaled $1.1 billion, catapulting 83.9% from the prior-year quarter. The significant rise was driven by an increase in all the components of expenses.

Since Jan 2009 through Jun 2014, Fannie Mae provided more than $4.2 trillion in liquidity to the mortgage market through its purchases and guarantees of loans. This enabled borrowers to complete the refinancing of 12.8 million mortgages and 4.1 million home purchases, while the bank provided financing for 2.3 million units of multifamily housing.

Further, Fannie Mae completed more than 32,000 loan modifications in the reported quarter. This brought the total number of loan modifications completed by the company to more than 1.1 million since Jan 2009.

As of Jun 30, 2014, Fannie Mae's total loss reserves declined 20.8% year over year to $42.1 billion. Further, as of Jun 30, 2014, allowance for loan losses totaled $39.1 billion, down 10.9% as of Dec 31, 2013.

As of Jun 30, 2014, cash and cash equivalents summed $20.8 billion compared with $19.2 billion as of Dec 31, 2013. Further, total mortgage loans amounted to $3.00 trillion, down marginally from $3.03 trillion as of Dec 31, 2013.

Additionally, Fannie Mae will pay taxpayers $3.7 billion as dividends in Sep 2014. Following this payment, the company will have paid a total of approximately $130.5 billion as dividends to Treasury. As of Jun 30, 2014, senior preferred stock outstanding and held by Treasury was $117.6 billion.

Our Viewpoint

Though Fannie Mae suffered losses during the crisis of 2008-2009 and had to be bailed out by the government, it managed to turn itself into a profitable organization supported by stable recovery in the housing market.

However, the mortgage lender's profitability is bearing the brunt of subsiding refinancing demand propelled by higher interest rates since 2013. Going forward, the pressure on top line will mount given the backtracking housing recovery.

Fannie Mae currently carries a Zacks Rank #3 (Hold). Some better-ranked companies in the same sector include Home Loan Servicing Solutions, Ltd. ( HLSS ), Federal Home Loan Mortgage Corporation ( FMCC ) and PennyMac Financial Services, Inc. ( PFSI ). All these stocks hold a Zacks Rank #2 (Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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