Fannie Mae second-quarter profit rises

Wed Jul 21, 2004
By Mark Felsenthal

WASHINGTON, July 21 (Reuters) - Fannie Mae, the No. 1 U.S. mortgage finance company, on Wednesday said second-quarter profit rose slightly, helped by a decline in losses from the repurchase of outstanding debt and an increase in guarantee fee income.

The government-sponsored enterprise said its second-quarter net income was $1.112 billion, or $1.10 a share, a 0.9 percent increase compared with net income of $1.102 billion, or $1.09 a share, a year earlier.

Fannie Mae (FNM.N: Quote, Profile, Research) said its core business earnings, which exclude accounting of market value changes of the company's interest rate derivative contracts, climbed 1.9 percent to $1.896 billion, or $1.91 per share, from $1.860 billion, or $1.86 per share, in the same quarter a year earlier.

Analysts polled by Reuters had been expecting $1.83 per share, according to Reuters Estimates.

The company said its mortgage portfolio, a key source of profit, had grown at an annual rate of 4.8 percent in the second quarter. Fannie Mae does not lend directly to borrowers but buys mortgages from lenders and repackages them as securities or holds them in its own portfolio.

But the company reined in expectations for core business earnings-per-share growth for the full year to a single-digit increase from close to 10 percent because of a narrowing of the difference between the interest it earns on its investments and the rate it pays to borrow.

Fannie Mae, which unexpectedly canceled a scheduled debt offering last week, also warned investors it might eliminate more note sales this year.

"As a result of a dynamic business environment, including factors ... such as mortgage product mix, growth in mortgage debt outstanding, and continued heightened competition for mortgage assets, the company desires additional flexibility in its funding strategies," it said in the earnings report.

Shares in company's stock fell $1.08, or 1.4 percent, to $73.20 in early trading on the New York Stock Exchange.

Fannie Mae said a 3.9 percent increase in guarantee fee income was offset in part by a $278 million expense stemming from accounting changes for investments that lost value. The company's government supervisor required the change after a review of the enterprise's bookkeeping.

Fannie Mae is under pressure from the Bush administration to accept tougher regulatory scrutiny after concerns raised by accounting problems at rival mortgage enterprise Freddie Mac (FRE.N: Quote, Profile, Research) in 2003. Administration and Federal Reserve officials have also expressed worries about the rapid growth of both government-sponsored enterprises and called for slower growth in their retained mortgage portfolios.

Debt issued by Fannie Mae and Freddie Mac is not backed by government guarantee. But investors believe that because Congress grants the companies certain benefits -- including the ability to borrow $2.25 billion each from the Treasury in an emergency -- the government would stand behind them in a crisis.

Fannie Mae said its exposure to derivative contracts was $534 million at June 30, up from $327 million at the end of the first quarter of the year.

In a separate report, the company reported that its duration gap, a gauge of its exposure to interest rate risk, narrowed to plus two months in June from plus three months in May.

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