16.1.2003: Meldung: Fannie Mae net income falls more than half

Fannie Mae, the giant US mortgage market operator, on Wednesday reported a big fourth-quarter slide in net income as it struggled to hedge its exposure to low interest rates and a volatile mortgage refinancing boom.

Drawing the curtain on a tough operating environment during 2002, Fannie Mae said fourth-quarter net income fell nearly 52 per cent, from $1.97bn to $952m. The cause was a big loss in the value of options and other derivatives it bought to counter its risk exposure to historically low US interest rates.

Fannie Mae said that the losses on these options amounted to $1.88bn in the fourth quarter, and to $4.54bn for all of 2002. In the fourth quarter of 2001, when the interest rate environment was more favourable - or at least less volatile - it recorded gains of $578m.

The losses were not realised, but they offset substantial gains in net interest income and guaranty fee income.

The "duration gap" - a measure, in months, of the difference between the maturities of the mortgages it holds and of the bonds that it issues to buy them - stood at minus five on December 31. The gap caused controversy when it stood at minus 14 on August 31; its current figure is inside Fannie Mae"s own target of plus or minus six months.

The company"s stock had fallen 1.9 per cent to $68.72 in early afternoon trading. The S&P 500 index was down about 1.5 per cent at the same time.

Despite the fourth-quarter performance, Franklin Raines, Fannie Mae chairman and chief executive, pointed to the overall performance for 2002. Net income declined 21.6 per cent and earnings per share fell 20.8 per cent, but operating net income and operating earnings per share rose 19.1 per cent and 21.3 per cent, respectively.

Fannie Mae insists operating net income and operating earnings per share are the best measures of its annual performance. "In an extremely difficult business environment that affected virtually every company in America, Fannie Mae"s operating results in 2002 were among the best in the company"s history," Mr Raines said.

Fannie Mae does not lend directly to mortgage holders. It instead plays a crucial role in the secondary market, buying blocks of mortgages from lenders and issuing mortgage-backed securities (MBS) to institutional and other investors to pay for them.

With US interest rates at 40-year lows, business boomed last year as mortgage holders switched to cheaper loans. Timothy Howard, Fannie Mae finance director, said total business volume was $849bn, 38 per cent higher than in 2001. Its mortgage portfolio grew by 11.9 per cent, and its outstanding MBS by 19.9 per cent.

According to Alexander Crawford, a mortgage market expert at Deutsche Bank, trading in the secondary market in MBS is now greater on a daily basis than in the US Treasury market.

Fannie Mae 2002 Financial Results:
GAAP net income at $4,619 million, down 21.6 percent; Net income per diluted common share at $4.53, down 20.8 percent

Operating net income at $6,394 million, up 19.1 percent;

Operating net income per diluted common share at $6.31, up 21.3 percent

GAAP Earnings Operating Earnings
--------------------------------------- ------------------------------
2002 2001 Change 2002 2001 Change
--------------------------------------- ------------------------------
Net Income (in Net Income
millions) (in
$4,619 $5,894 (21.6)% millions)$6,394 $5,367 19.1%
--------------------------------------- ------------------------------
(in dollars) (in
$4.53 $5.72 (20.8)% dollars) $6.31 $5.20 21.3%
--------------------------------------- ------------------------------

GAAP Earnings

Fannie Mae"s net income was $4,619 million in 2002 compared with $5,894 million in 2001, and earnings per diluted common share (EPS) were $4.53 in 2002 compared with $5.72.

For 2002 strong growth in net interest income of 30.6 percent and guaranty fee income of 22.5 percent were more than offset by a $4,507 million increase in mark-to-market losses in the time value of purchased options used to hedge the company"s interest rate risk.

These unrealized mark-to-market losses were recorded in accordance with Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. For the fourth quarter of 2002 Fannie Mae"s net income was $952 million, or $0.94 per diluted common share, compared with $1,969 million, or $1.92 per diluted common share, for the fourth quarter of 2001.

In the fourth quarter of 2002 $1,881 million of mark-to-market losses on purchased options were recorded compared with $578 million of mark-to-market gains in the fourth quarter of 2001.

Operating Earnings

Operating net income and operating EPS are non-GAAP (generally accepted accounting principles) measures that are the primary performance measures used by Fannie Mae"s management.

Operating net income and EPS provide consistent accounting treatment for purchased options and the options embedded in callable debt by allocating the cost of purchased options over their expected lives, comparable to the accounting used for these items prior to the adoption of FAS 133. Fannie Mae"s operating net income measure may not be comparable to similarly titled measures used by other companies.

Page one of the attachments to this release provides a reconciliation of GAAP to operating net income. Management believes that operating net income and operating EPS more accurately reflect the financial results of the company than GAAP measures which include the FAS 133 treatment of purchased options.

Operating net income was $6,394 million in 2002 compared with $5,367 million in 2001. Operating EPS in 2002 was $6.31, or 21.3 percent above 2001. Operating net income for the fourth quarter of 2002 was $1,672 million, a 16.3 percent increase compared with the fourth quarter of 2001. For the fourth quarter of 2002 operating EPS of $1.66 rose 18.6 percent above the same period in 2001.

During 2002, GAAP net income was $1,775 million less than operating net income because of $4,545 million (on a pre-tax basis) in mark-to-market losses in the time value of purchased options - interest rate swaptions and interest rate caps.

Mark-to-market losses on these options were the result of increased use of options and significant declines in interest rates during the year, mitigated by an increase in interest rate volatility. The unrealized mark-to-market losses in purchased option time value in 2002 were more than offset by increases in the intrinsic value of these options, which are not reflected in GAAP net income.

Because Fannie Mae generally holds purchased options to maturity or exercise, quarterly fluctuations in time value will net to the initial option premium over the expected lives of these options, and total purchased options expense therefore will equal the purchased option amortization expense included in operating net income. In 2001 GAAP net income was $527 million more than operating net income.

2002 Financial Performance Summary

Highlights of Fannie Mae"s 2002 financial performance include:

Record total business volume of $848.9 billion, 38 percent higher than 2001;
Growth in the total book of business of 16.4 percent, mortgage portfolio growth of 11.9 percent, and growth in outstanding MBS of 19.9 percent;
Taxable-equivalent revenue of $11.9 billion, up 16.8 percent compared with 2001;
An average net interest margin of 115 basis points compared with 111 basis points in 2001;
Credit-related losses of $87.0 million compared with $81.3 million in 2001; and,
Losses of $710.5 million from the call and repurchase of debt compared with $523.9 million in 2001.

Franklin D. Raines, Fannie Mae"s Chairman and Chief Executive Officer, said, "In an extremely difficult business environment that affected virtually every company in America, Fannie Mae"s operating results in 2002 were among the best in the company"s history." Raines noted that in 2002 Fannie Mae reported a second consecutive year of growth in operating earnings per share in excess of 20 percent, and posted its 16th consecutive year of double- digit growth in operating earnings per share. Raines said credit-related losses remained at historically low levels in 2002, and that in spite of volatile interest rates the duration gap on the company"s mortgage portfolio remained within its preferred range for all but three months of the year. Said Raines, "Fannie Mae"s disciplined risk management in the fast-growing market of residential mortgage finance has enabled us to achieve a record of growth and consistency of earnings over the past decade and a half that is without equal in financial services."

Fannie Mae"s Chief Financial Officer, Timothy Howard, said that the company"s 21.3 percent growth in operating earnings per share in 2002 was paced by 16.8 percent growth in taxable equivalent revenues. Adjusted net interest income -- net interest income less purchased options amortization expense -- grew by 16.7 percent during the year, while guaranty fees grew by 22.5 percent. Paced by record transactions and technology fees, Fannie Mae"s fee and other income rose by $81 million during the year.

Howard said that with interest rates falling to 40-year lows in 2002 and mortgage refinancings reaching unprecedented amounts, Fannie Mae"s business volumes soared to record levels. The company"s total 2002 business volume was $849 billion, 38 percent more than during 2001. Volume consisted of $371 billion in purchases for portfolio and $478 billion in mortgage-backed securities (MBS) issued to other investors. Howard noted that even with record liquidations of mortgages and MBS the company experienced strong growth in business outstandings during the year. Howard said that during the 12 months ended December 31, 2002 Fannie Mae"s total book of business grew by 16.4 percent, with its mortgage portfolio growing by 11.9 percent and its outstanding MBS growing by 19.9 percent.

Howard said that the company"s net interest margin averaged a higher-than-expected 115 basis points in 2002 as short-term interest rates continued to decline through much of the year. The 2002 net interest margin was 4 basis points above the 111 basis point average of 2001 and 14 basis points above the 101 basis point average of 2000. Howard added that the guaranty fee rate on outstanding MBS averaged 19.1 basis points in 2002 compared with an average fee rate of 19.0 basis points in 2001.

Finally, Howard said, Fannie Mae"s credit-related losses increased only slightly to $87.0 million in 2002 from $81.3 million in 2001. Although the number of properties acquired through foreclosure in 2002 rose by 35 percent, continued declines in the loss per case on foreclosure kept total credit losses relatively level. For the full year 2002, Fannie Mae"s credit loss ratio -- credit-related losses as a percent of mortgages and mortgage-backed securities outstanding -- was 0.5 basis points.

Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation"s largest source of financing for home mortgages.

Fannie Mae is working to shrink the nation"s "homeownership gaps" through a $2 trillion "American Dream Commitment" to increase homeownership rates and serve 18 million targeted American families by the end of the decade. Since 1968, Fannie Mae has provided over $4 trillion of mortgage financing for 47 million families.

More information about Fannie Mae can be found on the Internet at http://www.fanniemae.com.

Style Usage: Fannie Mae"s Board of Directors has authorized the company to operate as "Fannie Mae," and the company"s stock is now listed on the NYSE as "Fannie Mae." In order to facilitate clarity and avoid confusion, news organizations are asked to refer to the company exclusively as "Fannie Mae."


Fannie Mae, Washington
Janis Smith, 202/752-6673
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