Settlement Fee Drives Fannie Mae Q1 Earnings - Analyst Blog

Federal National Mortgage Association FNMA or Fannie Mae reported its first-quarter 2014 net income of $5.3 billion, down significantly from $58.7 billion earned in the prior-year quarter. This was nevertheless the company's ninth consecutive quarterly profit. Further, the first-quarter results included a $4.1 billion revenue flow related to the settlement with Bank of America Corporation BAC.

Share price of Fannie Mae gained nearly 1.5% following the earnings release on Thursday before the opening bell, thereby reflecting a positive market response.

Results were adversely impacted by lower credit related income and higher expenses partially offset by growth in both net revenue as well as investment income. Nevertheless, improvement in credit quality and strong liquidity position were the quarterly tailwinds.

Behind the Headlines

Fannie Mae's net revenue came in at $9.1 billion, growing 32.3% year over year. The rise was driven by increase in fee and other income, partially offset by lower net interest income.

Total credit-related income was $1.0 billion, down 14.9% from the year-ago quarter. The fall was due to lower benefit for credit losses partially offset by a slight increase in foreclosed property income. However, net investment gains increased 23.7% from the year-ago quarter to $146 million.

Administrative and other non-interest expenses totaled $1.1 billion, up 22.5% from the prior-year quarter.

Allowance for loan losses were $41.9 billion, down 4.4% from the year-ago quarter. Further, as of Mar 31, 2014, Fannie Mae's total loss reserves decreased to $45.3 billion from $47.3 billion as of Dec 31, 2013.

Since Jan 2009 through Mar 2014, Fannie Mae provided more than $4.1 trillion in liquidity to the mortgage market through its purchases and guarantees of loans. This enabled borrowers to complete the refinancing of 12.5 million mortgages and 3.9 million home purchases, while the bank provided financing for 2.3 million units of multifamily housing.

Further, Fannie Mae completed more than 36,000 loan modifications in the reported quarter. This brought the total number of loan modifications completed by the company to approximately 1.1 million since Jan 2009.

As of Mar 31, 2014, cash and cash equivalents were $14.1 billion compared with $19.2 billion as of Mar 31, 2013. Further, total mortgage loans were $3.02 trillion, down marginally from $3.03 trillion as of Mar 31, 2013.

Additionally, Fannie Mae will pay taxpayers $5.7 billion as dividends in the second quarter of 2014. Following this payment, the company will have paid a total of approximately $126.8 billion as dividends to Treasury. As of Mar 31, 2014, senior preferred stock outstanding and held by Treasury was $117.6 billion.

Our Viewpoint

The mortgage lender bailed out by the government during the crisis of 2008-2009 turned out to be a profit-yielding avenue with the steady recovery in the housing market. However as the pace of recovery slackens, the pressure on top line will mount. Moreover, since a major portion of the revenue is attributable to one time settlement fees we remain skeptical about sustainability of the company's profitability.

Fannie Mae currently carries a Zacks Rank #3 (Hold). Better-ranked companies in the same sector include Home Loan Servicing Solutions, Ltd. HLSS and Walker & Dunlop, Inc. WD. While Home Loan Servicing Solutions carries a Zacks Rank #1 (Strong Buy), Walker & Dunlop holds a Zacks Rank #2 (Buy).

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
 
BANK OF AMER CP BAC: Free Stock Analysis Report
 
FANNIE MAE FNMA: Get Free Report
 
HOME LOAN SERVC HLSS: Free Stock Analysis Report
 
WALKER & DUNLOP WD: Free Stock Analysis Report
 
To read this article on Zacks.com click here.
 
Zacks Investment Research