Fannie's $3.7B drawdown not as bad as it looks, CEO says

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Fannie Mae had warned of a fourth-quarter loss, but that didn't dull the pain of the actual numbers when they were released Wednesday, nor did it eliminate the need for explanation — lots of it was required.

The government-sponsored enterprise had recently been permitted to retain $3 billion for the quarter, but it had to burn that cushion and request a $3.7 billion draw from the Treasury to cover the $6.7 billion write-down of a deferred tax asset prompted by the new federal tax law.

The result: Fannie’s capital is back to zero.

Yet CEO Timothy Mayopoulos sought to reassure listeners on Fannie’s quarterly media call that "I wouldn't expect … any impact in the marketplace" because of the special circumstances.

He said in a follow-up interview that the timing was unfortunate, but that it is unusual situations like this quarter’s huge tax adjustment that the retained earnings were meant for.

"People have recognized there is potential volatility for us and for any other large financial institution quarter to quarter and that you should have some cushion in there to absorb that," Mayopoulos said. "Unfortunately, it wasn't possible to have this [retained-earnings] arrangement back in place before we experienced this one-time, accounting-driven event."

The Treasury draw "is not a reflection of our underlying business, which remains strong," Mayopoulos said.

Fannie reported a net loss of $6.5 billion for the quarter, driven by a $9.9 billion provision for taxes as a result of the write-down. In the fourth quarter of 2016, Fannie reported a $5 billion profit.

In future periods, the lower corporate tax rate is expected to benefit Fannie's net income.

Fannie and sister GSE Freddie Mac were allowed to start retaining a limited amount of capital under a decision made in December by Federal Housing Finance Agency Director Mel Watt and Treasury Secretary Steven Mnuchin.

The $3 billion per quarter is not enough for Fannie to be considered properly capitalized, Mayopoulos said during the media call.

Yet Congress should not use the fourth-quarter draw as an excuse to hurry to pass housing reform, a mortgage industry official said.

"Watt got it exactly right when he said two years ago this week that one of the greatest risks of a draw would be a 'legislative response adopted in haste,' " Consumer Home Lenders Association Executive Director Scott Olson said in a press release. "Of course, Congress should adopt sound GSE reform legislation, but this artificial accounting draw is not a good reason to rush through a potentially bad bill just as a reaction to this development."

For the full year, on a pretax basis, Fannie earned $18.4 billion, compared with $18.3 billion in 2016. Net income for the year was $2.5 billion compared with $12.3 billion a year earlier.

The company paid $12 billion in dividends to Treasury last year, bringing the cumulative total paid to $166.4 billion. This compares to the $119.8 billion in draws taken, including the $3.7 billion draw for the fourth quarter.

Because of Hurricanes Harvey, Irma and Maria, Fannie took a significant third-quarter provision for loan losses and made "modest adjustments" in the fourth quarter, Mayopoulos said. It is "a matter that we will continue to monitor as more data comes in and we actually see what the experience has been in these disaster-affected areas."

The third-quarter provision "was the best estimate we could make at the time with very limited information," especially when it came what was happening in Puerto Rico, added Chief Financial Officer David Benson. Looking at the data received in the fourth quarter, "it was actually an improvement by about $100 million of what we had estimated in the previous quarter. So it was really a very small adjustment to the better."

The California wildfires were not a material event for Fannie he added. Approximately 32% of the loans on Fannie's books at yearend were covered by credit risk transfer transactions.

Guarantee fees continue to drive a greater portion of Fannie's net interest income.

Fannie should be profitable in 2018. "When you look at the underlying fundamentals of our business, they are strong," Mayopoulos said in the follow-up interview. "The guarantee fees we are charging are covering our anticipated credit losses. That's a stable and viable source of revenue for us. We're much less dependent on investment income of a retained portfolio. Delinquencies have been stable and, putting aside the hurricane-affected areas, have actually improved year over year."

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