January 21, 2004
Amid a continued housing boom, Fannie Mae (NYSE: FNM ) reported that its net profit for the fourth quarter more than doubled year over year. For the quarter, the company turned in earnings of more than $2.12 billion, $2.21 per share, against $0.91 in 2002. The company also warned that it saw slowing growth in 2004 and that its earnings growth would return to more normal levels.
This shouldn't shock anyone. First, we are in the midst of a credit-fueled housing boom, spurred on by the second year of rock-bottom rates. That the largest credit provider would generate spectacular returns in such an environment should be expected. Second, after the Freddie Mac (NYSE: FRE ) scandal -- the company was reserving some of its earnings in a cookie jar to pull out for later smoothing -- it's likely that increased scrutiny "encouraged" Fannie Mae to favor accounting purity over appearances.
On Monday, Fannie Mae's CEO Franklin Raines testified before Congress, warning that a move to require advance government approval for mortgage finance products would crimp Fannie's and Freddie's ability to adjust their products to home buyers' needs. "If we cripple our ability to innovate, then your customers are going to pay," said Raines. "It's all going to come out in higher prices, and higher prices, as you know, means less demand."
Apparently Raines either missed or ignored the December report (pdf file) from the Federal Reserve that showed that the two government-sponsored entities do not appreciably lower costs to homeowners in aggregate, thus making his "less demand" argument essentially bogus. The report states that much of the benefit of an implied federal governments guarantee of Fannie's and Freddie's credits accrue not to homeowners, but to shareholders of the two companies. We don't really blame Raines for talking up his own book, but it's not like the Fed has a big Fannie Mae axe to grind in this case.
So whether one should look at the fourth-quarter earnings as being harbingers of bigger, better returns, we wouldn't bet the farm on it.
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