Tuesday, April 02, 2013

Fannie Mae reports record profit in 2012

by Bill McBride on 4/02/2013 11:01:00 AM

From Fannie Mae: Fannie Mae Reports Largest Net Income in Company History; $17.2 Billion for 2012 and $7.6 Billion for Fourth Quarter 2012

Fannie Mae today reported annual net income of $17.2 billion for 2012 and quarterly net income of $7.6 billion for the fourth quarter of 2012, compared with a net loss of $16.9 billion for 2011. The improvement in the company’s full-year and quarterly net income was due primarily to improved credit results driven by a decline in serious delinquency rates, an increase in home prices, higher sales prices on Fannie Mae-owned properties, and the company’s resolution agreements with Bank of America.

As a result of actions to strengthen its financial performance and continued improvement in the housing market, Fannie Mae’s financial results improved significantly in 2012 and the company expects to remain profitable for the foreseeable future. Based on analysis of all relevant factors, Fannie Mae determined that the valuation allowance on the company’s deferred tax assets was still appropriate as of December 31, 2012. The valuation allowance as of December 31, 2012 was $58.9 billion.
Fannie had a one time gain from their agreement with BofA, but this didn't includes releasing any of the valuation allowance on its deferred tax assets:
In evaluating the recoverability of Fannie Mae’s deferred tax assets, as of December 31, 2012, the company again determined that the factors in favor of maintaining the allowance outweighed the factors in favor of releasing it. Therefore, Fannie Mae did not release any of its valuation allowance as of December 31, 2012. The valuation allowance as of December 31, 2012 was $58.9 billion.

If and when Fannie Mae does release the valuation allowance on its deferred tax assets, it will be included as income in that period and will result in a corresponding increase in the company’s net worth as of the end of that period. Accordingly, Fannie Mae expects to pay Treasury a significant dividend in the quarter following a release of the valuation allowance on the company’s deferred tax assets. Although Fannie Mae has not completed its analysis, the company believes that, after considering all relevant factors, it may release the valuation allowance on its deferred tax assets as early as the first quarter of 2013.
Tom Lawler reported on this last month: "Given negative earnings and prospects for negative earnings, in 2008 Fannie felt that ... a large portion of its deferred tax asset would never be realized, and as a result it created a "valuation allowance" for its net deferred asset, which hit earnings and net worth."

Now Fannie expects to release a portion of the valuation allowance on its deferred tax assets in 2013, so expect a large reported profit, probably in Q1.

And on house prices (from the Fannie SEC filing):
Specifically, the profile of our single-family guaranty book improved due to:

• A 4.7% increase in home prices in 2012 compared with a home price decline of 3.7% in 2011. Higher home prices decrease the likelihood that loans will default and reduce the amount of credit loss on loans that do default.

• An increase in sales prices of our REO properties. We received net proceeds from our REO sales equal to 59% of the loans’ unpaid principal balance in 2012, compared with 54% in 2011. Sales prices on dispositions of our REO properties improved in 2012 as a result of increased demand compared with 2011 as well as our efforts to improve the sales execution of our REO properties. The increase in sales proceeds reduces the amount of credit loss at foreclosure and, accordingly, results in a lower provision for credit losses.

• A continued reduction in the number of delinquent loans in our single-family guaranty book of business. Our serious delinquency rate declined from 3.91% as of December 31, 2011 to 3.29% as of December 31, 2012 and our “early stage” delinquencies (loans that are 30 to 89 days past due) declined from 2.91% as of December 31, 2011 to 2.62% as of December 31, 2012. The reduction in the delinquency rates is due, in part, to our efforts since 2009 to improve our underwriting standards and the credit quality of our single-family guaranty book of business, which has resulted in a decrease in the number of loans becoming delinquent. A decline in the number of loans becoming delinquent or seriously delinquent reduces our total loss reserves and provision for credit losses.

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