WASHINGTON (MNI) - The following are excerpts from the statement by U.S. mortgage giant Fannie Mae Wednesday on its financial performance for the third quarter of 2010:
Fannie Mae (FNMA/OTC) today reported a net loss of $1.3 billion in the third quarter of 2010, compared to a net loss of $1.2 billion in the second quarter of the year. The company continues to focus on building a strong new book of business and returning to profitability (excluding Treasury dividend payments), and its operating results reflect stabilizing credit-related expenses and increasing revenues.
The company's net loss attributable to common stockholders was $3.5 billion, including $2.1 billion in dividend payments to the U.S. Treasury. To eliminate the company's net worth deficit of $2.4 billion as of September 30, 2010, more than 85 percent of which is the dividend payment to Treasury, the Federal Housing Finance Agency has requested $2.5 billion on the company's behalf from Treasury. Upon receiving those funds, the company's total obligation to Treasury for its senior preferred stock will be $88.6 billion. The company has paid a total of $8.1 billion in dividends to Treasury.
"Our operating results reflect our ongoing efforts to manage the credit-related expenses in our legacy business and build a new, profitable book of business," said Fannie Mae President and CEO Michael J. Williams. "The loans we have acquired since the beginning of 2009 reflect our commitment to realistic, common-sense lending standards and sustainable homeownership. Their credit profile remains strong, and we expect these loans to be profitable over their lifecycle. We are building this new book of business while we continue to provide liquidity to America's housing market as it struggles to recover, and to support programs to help families stay in their homes and avoid foreclosure whenever possible."
The company's net loss attributable to common stockholders was $3.5 billion, or ($0.61) per diluted share, compared with a loss of $3.1 billion, or ($0.55) per diluted share, in the second quarter of 2010. The net worth deficit of $2.4 billion as of September 30, 2010 takes into account the company's net loss, dividends paid on senior preferred stock held by Treasury, and a reduction in unrealized losses on available-for-sale securities during the third quarter.
Net revenues were $5.1 billion in the third quarter of 2010, up 13 percent from $4.5 billion in the second quarter of 2010, due primarily to an increase in net interest income. Net interest income was $4.8 billion, up 14 percent from $4.2 billion in the second quarter of 2010. The increase was due primarily to lower debt funding costs and the purchase from MBS trusts of the substantial majority of the single-family loans that are four or more monthly payments delinquent, as the cost of purchasing these delinquent loans and holding them in the company's portfolio is less than the cost of advancing delinquent payments to security holders.
For the third quarter of 2010, interest income that the company did not recognize for nonaccrual mortgage loans was $1.8 billion, compared with $2.2 billion in the second quarter of 2010.
Credit-related expenses, which are the total provision for credit losses plus foreclosed property expense, were $5.6 billion, up from $4.9 billion in the second quarter of 2010. The increase was driven in part by valuation adjustments that reduced the value of the company's real-estate-owned inventory, as well as higher expenses due to increased acquisitions of foreclosed properties.
Credit losses, which the company defines generally as net charge-offs plus foreclosed property expense, excluding certain fair-value losses, were $8.2 billion in the third quarter of 2010, compared with $7.0 billion in the second quarter of 2010. The increase was attributable to an increase in defaults, particularly those due to the prolonged period of high unemployment and the decline in home prices.
Total loss reserves and fair value losses previously recognized on acquired credit-impaired loans were $84.6 billion as of September 30, 2010, or 2.8 percent of the company's book of business, compared with $87.4 billion, or 2.9 percent of the company's guaranty book of business, as of June 30, 2010. The company considers its $19.8 billion of total fair value losses previously recognized on loans purchased out of MBS trusts an effective reserve for credit losses because the mortgage loan balances were reduced by these fair value losses at acquisition. Total nonperforming loans in the company's guaranty book of business were $213.3 billion, compared with $218.2 billion as of June 30, 2010. Net fair value gains were $525 million in the third quarter, compared with gains of $303 million in the second quarter of 2010. The increase was attributable primarily to gains on the company's trading mortgage securities due to rate declines and spread tightening.
Net other-than-temporary impairment was $326 million in the third quarter, compared with $137 million in the second quarter of 2010. The increase was due primarily to a decline in forecasted home prices for certain geographic regions that resulted in a decrease in projected cash flows on subprime and Alt-A securities.
NET WORTH AND U.S. TREASURY FUNDING
The Acting Director of FHFA has requested $2.5 billion of funds from Treasury on the company's behalf under the terms of the senior preferred stock purchase agreement between Fannie Mae and Treasury to eliminate the company's net worth deficit as of September 30, 2010. The company's third quarter dividend of $2.1 billion on its senior preferred stock held by Treasury was declared by FHFA and paid by us on September 30, 2010.
On September 30, 2010, Treasury provided to the company $1.5 billion to cure its net worth deficit as of June 30, 2010. As a result of this draw, the aggregate liquidation preference of the senior preferred stock increased from $84.6 billion to $86.1 billion as of September 30, 2010, and will increase to $88.6 billion upon the receipt of funds from Treasury to eliminate the company's third-quarter 2010 net worth deficit. Through September 30, 2010, the company has paid in aggregate $8.1 billion to Treasury in dividends on the senior preferred stock.
FORECLOSURE PROCESS DEFICIENCIES
Recently, a number of the company's single-family mortgage servicers temporarily halted foreclosures in some or all states after discovering deficiencies in their processes relating to the execution of affidavits in connection with the foreclosure process. These deficiencies have generated significant public concern and are currently being investigated by various government agencies and by the attorneys general of all 50 states, and have resulted in courts in at least two states issuing rules applying to the foreclosure process that the company anticipates will increase costs and may result in delays. The company has directed its servicers to review their policies and procedures relating to the execution of affidavits, verifications, and other legal documents in connection with the foreclosure process. The company is also addressing concerns that have been raised regarding the practices of some law firms that handle the foreclosure process in Florida for the company's mortgage servicers. In the case of one law firm under investigation by the Florida attorney general's office, the company has instructed the firm to stop processing foreclosures for its mortgage loans and has stopped servicers from referring new matters to the firm.
The Acting Director of FHFA issued statements on October 1 and October 13, 2010 regarding servicers' foreclosure processing issues. The company is currently coordinating with FHFA regarding appropriate corrective actions consistent with the four-point policy framework issued by FHFA on October 13, 2010. During the first nine months of 2010, 80 percent of the single-family properties the company acquired through foreclosures involved mortgages on which the borrowers had made three or fewer payments in the preceding 12 months.
Although the company expects the foreclosure pause will likely negatively affect its serious delinquency rates, creditrelated expenses, credit losses, and foreclosure timelines, it cannot yet predict the extent of the impact.
** Market News International Washington Bureau: 202-371-2121 **
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