Why is Fannie Mae a Government Owned Business Losing Money in a Strong Real Estate Market with Low Defaults?

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The real estate market is strong. Mortgage rates are still low. Incomes are up and unemployment is down. These factors mean few people are defaulting on their loans. Yet, Fannie Mae managed to lose $6.5 billion in the fourth quarter of 2017. What is going on?

According to USA Today, major changes to tax laws under the Trump administration led to the financial loss. This is putting the government controlled mortgage company in the role of needing assistance from taxpayers for the very first time since it climbed out of the housing crisis in 2012.

Fannie Mae stated last month the net worth of the company was a negative $3.7 billion after it needed to remeasure tax assets of nearly $10 billion as was mandated by the new Tax Cuts and Jobs Act. This was signed into law by Trump just before the end of the year.

Due to the change in tax law, Fannie Mae stated its net income was $2.46 billion for last year, down big from $12.31 billion in 2016. But pretax income was $18,45 billion, which was a bit better than $18.33 billion in 2016.

There were many other large companies in the US that had major accounting changes because of the new tax laws that took effect Jan. 1.

According to CEO Tim Mayopoulos, the results for 2017 showed that the fundamentals of the company are strong. The results from Q4 were because of an accounting change required by the changing tax law. He said Fannie Mae should benefit from lower tax rates in the future.

Fannie Mae noted that it expects to ask the US Treasury for $3.7 billion to offset the deficit.

This is not popular news for many Americans. The US government was forced to rescue Fannie Mae and Freddie Mac during the housing meltdown of a decade ago with a total $187 billion bailout by the taxpayers. Fannie Mae had not borrowed money from the US Treasury since 2012. The company has made regular dividend payments totaling $130 billion since then and more than repaid the bailout.

While some in the US are concerned at the negative outcome for Q4 for Fannie Mae, Fannie’s business model looks stable. The number of mortgages that it backs that are 90 days late increased to 1.24% at the end of 2017, which was an increase from 1.01% at the end of September 2017. The company noted that the increase had been caused by two serious hurricanes that hit Texas and Florida.

Fannie added that even though there was a Q4 loss, FHFA Director Mel Watt stated that Fannie and Freddie would continue to make payments to trust funds that finance affordable housing. Some Republicans argue that these payments should be paused when Fannie and Freddie are drawing money from taxpayers. But in the annual report for Fannie, Watt said they would continue because it is believed this draw on taxpayer funds was a one time event from tax law changes and not from financial instability.

What Does Fannie Mae Do, Anyway?

Fannie Mae does not actually issue mortgages. Instead, it buys certain mortgages from banks and other enders and turns them into mortgage backed securities. Then it sells the securities to investors around the world. This allows lenders in the US to free up more cash to issue more loans. This government support of the mortgage industry helps to make loans more widely available. It also ensures there is more liquidity in the market and means that more loans can be bought and sold.

To qualify to issue loans backed by Fannie Mae, the lenders must go through an application process and meet various guidelines. They must, for example, show that they have checked the person’s income carefully to ensure they can afford the loan. In exchange, Fannie assumes the risk and protects the lender when the homeowner defaults on the loan. Fannie Mae does a lot of business with many mortgage lenders and most Americans do not even know their loan is backed by Fannie Mae.

Being backed by Fannie Mae matters because without that backing, the requirements to be approved for a mortgage would be much higher and more difficult. Fannie Mae allows mortgages with a 3% down payment these days, and you only need a credit score as low as the 620s. Because Fannie Mae guarantees the loan, it is much easier for millions of Americans to stop renting and to buy their own home.

It is not really a concerning event that Fannie Mae took a financial hit last quarter. Going forward, Fannie Mae should be profitable again, so there is no real cause for concern regarding the housing market.

References: https://www.usatoday.com/story/money/markets/2018/02/14/fannie-mae-loses-6-5-billion-4-q-tax-change/338013002/

 

With over two decades in the mortgage sectors, Mr. Dornan brings a lot of experience to the table. Bryan Dornan has founded several lending companies and written several hundred articles related to home financing, real estate and more.

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