Fannie's record profit a symbol of housing rebound
Home prices are up. Foreclosures are down. Construction is up. And now comes the latest sign of the U.S. home market's revival: Fannie Mae, the mortgage giant that nearly collapsed five years ago, has earned its biggest yearly profit ever.
Fannie Mae earned $17.2 billion last year and said Tuesday that it expects to stay profitable for "the foreseeable future." It also paid $11.6 billion in dividends to the U.S. Treasury in 2012.
And last year was Fannie's first since its takeover by the government in 2008 that it asked for no federal aid. As recently as 2011, Fannie lost nearly $17 billion and requested and received nearly $26 billion in aid.
The speed of Fannie's resurgence is a testament to a much healthier U.S. mortgage market.
Fannie's "profit recovery has come at a faster pace than I thought it would," said Bert Ely, a banking industry consultant.
Once symbols of the reckless risk-taking that fed the housing bubble, Fannie and the smaller firm Freddie Mac were seized by the government in 2008 after they were buried by bad mortgages. Taxpayers have spent $188 billion to rescue the two - collectively the costliest bailout of the financial crisis.
During much of the 1980s and 1990s, Fannie's stock was a darling of Wall Street, thanks in part to home-price increases and the government's implicit backing. In 1988, it was added to the Standard & Poor's 500 stock index. In 1996, Fannie reported its 10th straight year of record profits.
Pay for Fannie's top executives soared. One former CEO, Franklin Raines, received roughly $90 million in compensation from 1998 through 2003, according to Fannie's regulator. The regulator concluded that some Fannie employees had rigged accounting so the company could meet earnings targets and top executives could receive bonuses.
The excesses at Fannie paralleled the housing market's surge - until they fizzled along with the industry boom.
Fannie still has a long way to go to repay taxpayers. It received $116 billion in aid. So far, it's repaid $35.6 billion.
Fannie and Freddie don't actually make loans. Rather, they buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. In doing so, they help make loans available and exert influence over the housing market.
Together, Fannie and Freddie own or guarantee about half of U.S. mortgages - nearly 31 million home loans worth $5 trillion. And along with other federal agencies, they back about 90 percent of new mortgages.
The two companies nearly folded during the financial crisis because of huge losses on risky mortgages they bought. Fannie and Freddie bore some responsibility for those losses. Like banks, they relaxed their standards on the loans they bought or guaranteed during the boom and failed to thoroughly check incomes and assets. High-interest loans, some with low "teaser" rates, were given to risky borrowers.
Fannie and Freddie grew spectacularly as demand for mortgages exploded. The two firms, championed by powerful Washington lawmakers, rushed to compete with big banks for dominance in the home-loan market. In doing so, they bought or guaranteed mortgages they once would have deemed too risky.
Now, the two companies are benefiting from the home market's steady recovery. Previously occupied homes are being sold each month at a seasonally adjusted annual rate of nearly 5 million, compared with a recession low below 4 million. Nationally, prices have risen nearly 9 percent since bottoming in March 2012. The number of homes repossessed by lenders has reached its lowest point since September 2007, according to RealtyTrac, a foreclosure listing firm.
And the proportion of loans Fannie holds or guarantees that are at least 90 days' delinquent is down: The figure dropped to 3.3 percent at the end of 2012, compared with 5.5 percent in early 2010.
Ely, the industry analyst, thinks their financial improvement also reflects higher fees that Fannie and Freddie now charge banks to guarantee their mortgages.
Fannie earned $7.6 billion in the October-December quarter, a quarterly record for the company. About $1.3 billion of the gain came from a settlement paid by Bank of America Corp. related to mortgages that soured during the housing crash.
Fannie paid the Treasury a quarterly dividend of $2.9 billion. Under federal policy, Fannie and Freddie must give their profits to the government. Fannie's fourth-quarter earnings compared with a net loss of $2.4 billion in the final quarter of 2011.
"Our financial results improved significantly in 2012, and we expect our earnings to remain strong over the next few years," Timothy Mayopoulos, Fannie's CEO, said in a statement.
After their takeover by the government, Fannie's and Freddie's pay and bonus structure came under fire when it was revealed that 12 executives received a total of $35.4 million in salary and bonuses in 2009 and 2010. Fannie's chief executive received about $9.3 million for the two years, Freddie's $7.8 million.
Once mainstays of the New York Stock Exchange, the stocks of both companies traded above $60 in 2007. Since 2010, both have been listed on the Over-the-Counter Bulletin Board, an electronic quotation service. They're trading below $1.
Since taking control, the government has owned 80 percent of each company, and a federal regulator has made financial decisions.
The government provided taxpayer aid in exchange for preferred stock in the two companies. The stock pays 10 percent interest, which Fannie and Freddie have been repaying in dividends each quarter in which they make a profit.
Freddie has received $72 billion in federal aid and paid back nearly $24 billion. Freddie has reported positive earnings for five straight quarters.
Fannie and Freddie have since tightened their credit standards for the borrowers whose loans they back. And early last year, under pressure from Congress, the companies' regulator capped pay for their CEOs at $500,000 a year and eliminated annual bonuses for all employees.
As recently as mid-2011, some experts had suggested that Fannie and Freddie were so deep in debt to the government that it could take decades for them to repay taxpayers. But the past 12 to 18 months have marked a solid advance for the housing market, noted Ken Mayland, president of ClearView Economics, and Fannie and Freddie will continue to benefit.
"It's a spirited recovery," he said. "The housing sector will be by far the strongest (economic) sector growth-wise."