Fannie Mae on the upswing

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Mortgage lender Fannie Mae's stock and earnings are beginning to recover.

The government-sponsored enterprise is working to stabilize the housing market by offering mortgage-rescue packages to homeowners.

Along the way, the company is drawing in customers trying to avert the financial crisis of losing their homes.

New mortgages are expected to drop from $700 billion in the first half of this year to about $300 billion in the second half, Daniel H. Mudd, Fannie Mae's chief executive officer, said during a Sept. 20 hearing before the House Financial Services Committee. In addition, about $600 billion in subprime loans are scheduled to reset at higher monthly payment rates by the end of 2008.

"For the broader housing market and the economy in general, this lack of liquidity could have far-reaching effects," Mr. Mudd said.

However, homeowners' losses can be Fannie Mae's gains, according to housing-industry analysts.

"We believe that with the current crisis in the mortgage market, the role of the [government-sponsored enterprises] as the providers of last resort becomes more important and, therefore, their valuation will have to be re-examined," said Paul J. Miller Jr., analyst for the financial firm Friedman, Billings, Ramsey.

He was referring to the government-sponsored enterprises Fannie Mae, Freddie Mac and Ginnie Mae. All of them buy mortgages on the secondary market, pool them, then sell them as securities to investors on the open market.

Fannie Mae makes money by charging a guarantee fee on loans it secures as bonds. Fannie Mae also guarantees the loans will be repaid, even if the borrower defaults.

Fannie Mae reported net income of $4.1 billion, or $3.65 per share, in 2006, compared with net income of $6.3 billion, or $6.01, in 2005. The company reported revenue of $8.5 billion in 2006, compared with $10.4 billion in 2005.

The firm has not yet reported any earnings in 2007 because of previous accounting problems that have not yet been resolved.

A 2003 government investigation revealed the company's records were manipulated to meet financial analysts' earnings estimates. The Office of Federal Housing and Oversight also said Fannie Mae lacked the infrastructure to do a proper accounting of its more than $700 billion in assets.

Its quarterly financial reports are delayed as consultants revamp Fannie Mae's accounting procedures. The 2007 reports are scheduled to be released early next year.

The lower 2006 income reflects regulatory burdens of the accounting problems, less interest income as well as fewer new mortgages during the current housing slump, analysts said. The government's intent in chartering Fannie Mae in 1938 was to lend stability to the mortgage market.

Fannie Mae's business outlook looks reasonably good as homeowners dump their adjustable-rate mortgages and refinance into fixed-rate mortgages, Mr. Miller said.

Monthly payments on adjustable-rate mortgages fluctuate with interest rates, which has created financial havoc for some homeowners as interest rates rose in the past two years. Payments on fixed-rate mortgages do not change.

Fannie Mae is benefiting from having previously avoided large investments in high-risk mortgages, Mr. Miller said.

Its stock, FNM on the New York Stock Exchange, closed yesterday at $62.49 per share, up 3 percent, or $1.68, from Friday's closing price. Its stock value is up about 14 percent in the past six months.