One way to gauge the strength of Fannie Maes fourth quarter is to consider just how much the company was willing to forgo.
The secondary mortgage giant whose performance offers a glimpse into the state of the mortgage industry rode the effects of a record 11 rate cuts by the Federal Reserve and the resulting refinance boom, to fourth-quarter net income of $1.44 billion, or $1.40 a share, up 23.5% from the year-earlier period.
There are plenty of reasons that years like 2001 will be few and far between. The year saw record loan volume across the industry fuel corresponding earnings booms at many companies.
What happened in 2001 was a once-in-a-generation thing, said Gary Gordon, the managing director for specialty finance research at UBS Warburg. He pointed to the Fed funds rate, which dropped from 6% to 1.75%. You obviously cant count on this every year, he said.
Fannie, which expects to better its net income in 2002, gave itself a bit of room to navigate. Analysts noted that its fourth-quarter earnings would have been 20 cents higher had it not paid down debt and donated $300 million of common stock to the Fannie Mae Foundation.
Even with that cushion, the company and certainly the mortgage industry have a major challenge ahead if they plan to top 2001s numbers.
In his Dec. 31 outlook, the companys chief economist, David W. Berson, lowered its origination projection for 2002 by 16%, to $1.6 trillion. He predicted that home sales would dip as rising mortgage rates impede refinancing. Though the home-purchase market is expected to remain strong this year, he wrote, it will not make up for the drop in refinancing.
And there are signs building that even Fannie is not immune to a slowdown.
Michael J. Grondahl, an analyst at U.S. Bancorp Piper Jaffrey, said Fannies retained portfolio purchase commitments in which it makes a commitment to buy loans that it will hold rather than sell or securitize fell 63% in December, to $17.8 billion. Experts generally look to retained portfolio growth as a key driver of Fannies earnings.
We believe that as the economy recovers, interest rates will continue to slowly climb, further pressuring mortgage rates and refinance volumes, Mr. Grondahl said.
Because of these and other concerns, Fox-Pitt, Kelton Inc. on Monday lowered its buy rating on Fannie to attractive.
Still, expectations are for Fannie to show solid growth for at least one more year.
Chad Yonker, a senior vice president at Fox-Pitt, said that Fannie could post earnings growth of almost 20% in 2002, but it will suffer a big drop-off in 2003 because of slower portfolio growth, lower interest rate margins, and an increase in credit-related expenses.
Jayne Shontell, a senior vice president for investor relations and corporate development at Fannie Mae, said it is in a strong position, which combined with another solid housing market should make 2002 an above-trend year for us.
Origination projections have nothing to do with business volumes, she said in an interview, arguing that growth in mortgage debt is a better measurement of the companys success. We think the outlook for the decade is very good, Ms. Shontell said.
Mr. Gordon at UBS Warburg said after the first quarter Fannies portfolio growth and interest rate margins should return to normal parameters, for earnings growth of 16% in 2002 and 13% in 2003.
Mondays report offered one last time for Fannie to savor 2001.
For the full year, the companys net income rose 20.7%, to $5.37 billion, or $5.20 a share. Wall Street received the news warmly, pushing its stock up more than 2% in early trading, to $79.80.
In a statement, Fannie chairman and chief executive Franklin D. Raines said his objective of doubling earnings between 1998 and 2003, announced shortly after he took the helm in 1999 is well within reach given Fannies numbers last year and its prospects for 2002.
At the time we set this goal, few expected us to attain it, he said.
