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Mortgage Buyer Fannie Mae's Fourth-Quarter Profit Hurt by Massive Derivative Losses
Associated Press ^
| 1-15-02
| Associated Press
Posted on 01/15/2003 10:18:05 AM PST by AdamSelene235
Mortgage Buyer Fannie Mae's Fourth-Quarter Profit Hurt by Massive Derivative Losses
Fannie Mae Profits Miss Expectations
WASHINGTON (AP) -- Mortgage buyer Fannie Mae said Wednesday that its fourth-quarter net profit was off by more than half, hurt by low interest rates that cut into the value of its derivatives.
Fannie Mae reported earnings of $952 million, or 94 cents a share -- below analyst expectations of $1.64 a share and much lower than its 2001 profit of $1.97 billion, or $1.92 a share, in the fourth quarter.
Fannie Mae posted a loss of $1.88 billion on purchased options, compared with a gain of $578 million in the year earlier. It uses the derivatives to hedge against certain risks associated with holding loans. An accounting change, which took effect in 2001, requires companies to record changes in the market value of all derivatives even if they aren't sold.
For the year, Fannie Mae earned $4.62 billion, or $4.53 per share, compared with $5.89 billion, or $5.72 per share, in 2001.
Analysts, however, were expecting 2002 earnings of $6.29 a share, according to Thomson First Call.
Net interest income jumped 31 percent and guaranty-fee income rose 23 percent, but those gains were more than offset by a $4.51 billion increase in losses on derivatives.
Washington-based Fannie Mae is a public company mandated by the federal government. It provides liquidity in the mortgage market by buying mortgages from lenders and packaging them for resale, transferring risk from lenders and allowing them to offer mortgages to people who would not otherwise be considered.
Fannie Mae shares traded midday Wednesday at $68.64, down $1.41, or 2 percent, on the New York Stock Exchange.
TOPICS: Business/Economy; Extended News
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To: Southack; rohry; arete
bump
To: AdamSelene235
Pardon my ignorance but what is Fanniemae doing investing in derivatives anyways?
3
posted on
01/15/2003 10:20:47 AM PST
by
jriemer
To: jriemer
Pardon my ignorance but what is Fanniemae doing investing in derivatives anyways? Fannie Mae is a money pump used to inflate the value of real estate. The more real estate inflation they can cause, the more access they have to the income streams of working stiffs.
Naturally, this requires massive leverage and debt ( Current debt to equity ratios of 50 to 1). In fact, the GSE's now hold more debt than the publicly held Treasury debt. The only way to hedge such risk (both and interest and credit risk) is with derivatives.
If the GSE's blow both the real estate and bond markets will be simultaneously compromised. Did I mention they are exempt from SEC regulations....especially those regarding transparency?
Have a nice day !!
To: jriemer
To: jriemer
Bubble, what bubble?????
Wednesday, January 15 2003 1:34pm ET - U.S. Markets close in 2 hours and 26 minutes.
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FNM vs. S&P Nasdaq Dow |
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| Splits: 17-Oct-89 [3:1], 16-Jan-96 [4:1] |
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1:14pm · 69.10 |
Change
-0.95 (-1.36%) |
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70.05 |
Open
70.05 |
Volume
3,275,900 |
Day's Range
68.52 - 70.05 |
Bid
N/A |
Ask
N/A |
P/E
13.12 |
Mkt Cap
68.340B |
Avg Vol
3,900,409 |
52-wk Range
58.85 - 84.10 |
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N/A |
Ask Size
N/A |
P/S
1.32 |
Div/Shr
1.32 |
Div Date
Nov 25 |
1y Target Est
94.52 |
EPS (ttm)
5.34 |
EPS Est
6.29 |
PEG
0.79 |
Yield
1.88 |
Ex-Div
Oct 29 |
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To: AdamSelene235; rohry; Wyatt's Torch; arete; meyer; DarkWaters; STONEWALLS; TigerLikesRooster; ...
My question is, who is profiting from Fanniemae's losses?
To: AdamSelene235
Oh no! FNM only gave investors a bit more than a 6.5% real return for 2002 ($4.53 per share in profits not counting $1.32 in dividends on a stock that costs $69.10 to own).
Clearly the sky is falling, the sky is falling!
Quick everbody, run sell your real estate, it's just gotta CRASH!!!!!
< /Hard Time >
8
posted on
01/15/2003 11:07:30 AM PST
by
Southack
(Media bias means that Castro won't be punished for Cuban war crimes against Black Angolans in Africa)
To: jriemer
they own mortgages. mortgages provide a stream of cash flows that are fairly predicatable in stable interest rate environments. as rates fall, people refinance there mortgages, which results in a lack of predictability in the cash flows. fnma buys options (interest rate floors) that pay them money as rates go down, so not sure how they lost money on the derivative.
it may be though, that they had been paying fixed on interest rate swaps as rates went down, in order to lock in/hedge their fixed rate cash stream they were receiving on the mortgages, but rates continued to fall, so it looked like they were paying too high a rate on the derivative. since derivatives are marked to market, while mortgages are accrued it looked like they lost money. with rates falling the mortgages should have gained value, since they would have been receiving a higher than market fixed rate on any that didn't get refinanced.
if you have poorer than expected earnings, throw in the dirty "D" word (derivative)and you have a great excuse for everyone to say it wasn't your fault.
To: jriemer
This is what happens in an low short rate environment for mortgage backed securities.The CMO's get refinanced and that throws the cash flows completely out of whack.It's a boon to mortgage holders but not issuers, and FNM is the largest issuer in the world.They use the derivatives to hedge the pre-payment risk and manage the volatility that stripped mortgages have.They are now marked to market instead of marked to the duration of the mortgage, so if the option and swap was designed to hedge a 30 yr fixed rate mortgage at 7% and it's now at 5.5%, well, the CMO is going to take a huge haircut, even though if kept on the books, the hedge still works through the life of the mortgage.
This why Orange County went bankrupt in 1995, though their derivative hedges were still operable.Unwinding a hedge before its time due to nervous nellies can cause more problems than can be imagined.
To: AdamSelene235
thanks for all that info.
To: habs4ever
uh oh - not another derivs geek? ....see my post above yours
To: AdamSelene235
Gee, that Fannie Mae sure has an impressive chart!
Does it look 'toppy' to anyone but me?
;^)
To: housethatruthbuilt
I deal in options everyday, but the yield curve and mortgages aren't my forte.Too much rocket science for my low wattage noodle.
To: headsonpikes
Ohyeah, it's toppy. So is their organization.
What's interesting is that they are completely sidestepping the truth.
That as their portfolio get's reduced in earnings as the average of their held mtgs decreases their yield ... that quess what ??? ... their earnings will go down. And, this could be for a long while until Greenspan gets his heel off of interest rates and then the time it takes for the portfolio to roll over the low interest mtgs to higher interest mtgs and the overall yield of their portfolio can climb again. This looks like it maybe several years in the offing and I mean years !
2+2=4, except for portfolio public PR managers.
15
posted on
01/15/2003 12:26:11 PM PST
by
imawit
To: Southack
I dare say, it's not RE that will crash but the black curtain ops for feeding dollars into the mtg industry.
16
posted on
01/15/2003 12:30:36 PM PST
by
imawit
To: Southack
Oh no! FNM only gave investors a bit more than a 6.5% real return for 2002 ($4.53 per share in profits not counting $1.32 in dividends on a stock that costs $69.10 to own). And how much of shareholder equity did they loot to close the duration gap the first time? We're not allowed to see the books so we don't know. The WSJ estimated 50% of shareholder equity was extracted in the past year.
To: AdamSelene235
To: AdamSelene235
The only way to hedge such risk (both and interest and credit risk) is with derivatives. But what happened for the hedges to cause such losses? And if the hedge went bad, doesn't that mean that whatever you were using the hedge to hedge against has gone well?
To: housethatruthbuilt
Dude! I was the other side of FNM's trades!
Seriously, most of the money I've been making the last few quarters has been shorting debt options at high implieds to forced buyers like the monster of Wisconsin Avenue.
It make the profit so much sweeter knowing who the ultimate counter-party is. :)
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