Mortgage finance company Fannie Mae posted a record $7.6 billion in quarterly earnings, but it refrained from booking a tax-related gain that would have allowed the bailed-out company to repay as much as $59 billion to the government.
The U.S.-controlled company said it expects to be profitable in the future. Profits would allow it to record gains on billions of dollars worth of assets it had written down. That would help Fannie Mae repay roughly $117 billion it owes the U.S. Treasury for a taxpayer rescue during the financial crisis.
But Fannie Mae executives told reporters on a conference call that the company concluded it could not be sure enough of the timing of future profits to record that gain. If Fannie Mae had taken the gain, it would have reduced the company's eligibility to borrow cheaply from the Treasury. This could have forced the company to pay more to borrow in the market.
"It was more of a defensive decision aimed at maintaining potential funding rather than a regulatory concern about future earnings," said Isaac Boltansky, a policy analyst at Compass Point Research & Trading.
Fannie Mae's regulator, the Federal Housing Finance Agency, approved this decision, and Fannie Mae said in a filing that it expects to start taking those tax-related gains as early as the first quarter of 2013.
The future of Fannie Mae and its smaller rival Freddie Mac is in question as lawmakers try to figure out the best way to minimize taxpayer exposure to mortgage funding without pressuring the housing market. The U.S. government seized the two housing financiers in 2008 during the housing market crash and financial crisis as losses mounted on soured loans.
Fannie Mae missed its March 18 filing deadline for its fourth-quarter financial results and said it needed more time to analyze its deferred tax assets which are essentially prepaid taxes whose benefit can be realized in the future.
When companies are unsure about their ability to earn enough profit in a short enough time frame, they essentially write down deferred tax asset through recording a "valuation allowance." If earnings are later expected to be high enough, the valuation allowance can be reversed, resulting in big one-time gains. Fannie Mae was trying to decide whether it would earn enough money soon enough to merit reversing the valuation allowance.
"This is a thorny accounting situation for management and those making accounting decisions," said Jim Vogel, head of interest rate strategy at FTN Financial in Memphis, Tennessee.
Accounting concerns have dogged Fannie Mae for years. In 2006, a report from its then-regulator found the company had consistently used aggressive accounting to defer income and expenses, resulting in steady profit growth, and high bonuses for company executives.
On Tuesday, Fannie Mae reported that its fourth-quarter earnings helped it rack up $17.2 billion of profit in 2012, its first year in the black since 2006.
As the housing market has stabilized, Fannie Mae and Freddie Mac have begun recording profits again. U.S. home prices in January were 8.1 percent higher than a year earlier and mortgage delinquencies in the fourth quarter fell to their lowest level since 2008.
Fannie Mae Chief Executive Officer Timothy Mayopoulos said in a conference call with reporters that "2012 really marked a turning point for us."
Earlier this year the U.S. government eased some of the terms of the bailout for Fannie Mae and Freddie Mac. The easier terms allow the companies to give most of their profits to the government. Previously, the companies had to pay dividends to the government even if they were not profitable which forced them to draw down on lines of credit to meet these obligations.
BIGGER QUESTIONS LOOM
Fannie Mae and Freddie Mac buy and guarantee home loans that meet their standards and package them into bonds. The companies own or guarantee $5.2 trillion in mortgages, and along with the Federal Housing Administration are backing 9 out of every 10 U.S. mortgage loans now.
Congress and the White House have made little progress in advancing legislation to determine the future of the two mortgage companies, though both Republicans and Democrats say they should be wound down.
"I don't think that policymakers should look at our return to profitability as a reason not to address what the structure of the future of housing finance should be," said Fannie Mae's Mayopoulos.
Republican Senator Bob Corker reiterated his call that so-called government sponsored enterprises (GSE) profits not become an excuse for congressional inaction and said there is a need for long-term reform of the U.S. housing finance system.
"I'm glad Fannie Mae is showing an increase in income, but we have to remember that this is largely because we have crowded out private capital and made Fannie or Freddie the only viable execution option for new loans," he said in a statement.
Corker was among a bipartisan group of U.S. senators that introduced a bill last month to prevent the government from using fees collected by Fannie Mae and Freddie Mac to pay for other government programs.
Since the announcement of Fannie Mae's record earnings earlier on Tuesday, the risk premiums, or spreads, of both Fannie Mae's and Freddie Mac's bonds over comparable Treasuries narrowed 0.02 percentage points from Monday's close. Five-year Fannie Mae debt was yielding 10 basis points above comparable Treasuries.
"This says the housing market is doing well. Their losses on their foreclosed homes are falling, but the rate is still quite high. Rising home prices and falling delinquencies have improved Fannie's profitability," said Mary Beth Fisher, head of U.S. interest-rate strategy at SG Corporate & Investment Banking in New York.
For the first time since house prices started slumping in the summer of 2006, a closely watched barometer for housing prices showed that all of the 20 major cities tracked by the S&P/Case Shiller Home Price Index rose on a year-over-year basis in January.