WASHINGTON - Despite a sharp drop in loan volumes, Fannie Mae's earnings were up 9% in the first quarter, to $554.5 million.

Fannie also managed to increase its earnings per share by a penny, to $2.03, over the level in the fourth quarter of last year. This was the 29th consecutive quarter in which Fannie Mae reported higher earnings, and analysts hailed it as a victory.

"We sneaked through this quarter," said Bruce Harting of Salomon Brothers Inc.

Income from Fannie Mae's two major lines of business - holding and securitizing mortgages - was down slightly from the levels in the preceding quarter.

But the government-sponsored enterprise eked out higher earnings than in the December quarter, with a 7% cut in administrative expenses, an increase in miscellaneous income, and the buyback of about half a million shares.

Jonathan E. Gray of Sanford C. Bernstein & Co. said business volumes at Fannie Mae hit a low point in the first quarter because of the continued strength of adjustable-rate mortgages and the usual weakness of home purchases in the quarter.

In addition, Fannie Mae held back on acquiring loans because mortgage spreads have hit historical lows.

As purchase activity increases and the share of fixed-rate loans goes up, Fannie Mae's loan purchases and securities issuances will surge, Mr. Gray said.

Also, Fannie Mae will be able to bid more aggressively for loans without pushing down the margins, he said.

Mr. Harting of Salomon Brothers said the outlook for Fannie Mae would be strong in a slowing economy, because the pressure on interest margins would ease.

In a prepared statement, Lawrence M. Small, Fannie Mae's president and chief operating officer, said miscellaneous income rose because Fannie Mae recognized deferred Remic fees.

Instead of outsourcing some of its Remic servicing, Fannie Mae has acquired technology to do some of the processing in-house.

The reduction in administrative costs reflects "a response to the slowdown in business volumes and expense control efforts," Mr. Small said.

Mr. Harting said the response has included some staff cutbacks at Fannie Mae.

Interest income, which Fannie Mae earns on its loan portfolio, was $708.4 million, down from $711 million in the fourth quarter.

Guaranty fees on the loans securitized by Fannie Mae were $267.6 million, down from $269.1 million in the fourth quarter.

Miscellaneous income was $34.7 million, up from $25.3 million in the fourth quarter.

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