Federal National Mortgage Association

Type: Public
Founded: 1938
Location: Washington, DC
Key people: Daniel Mudd, Chief Exec. Officer, Exec. VP
Industry: Credit Services
Products: Financial Services
Revenue: $53.8 billion (2003)
Employees: 5,055
Website: www.fanniemae.com

The Federal National Mortgage Association (FNMA; NYSE: FNM), commonly known as Fannie Mae, is a United States Government-sponsored corporation created in 1938 to establish a secondary market for mortgages insured by the Federal Housing Administration (FHA). Fannie Mae buys mortgages on the secondary market, pools them and sells them as mortgage-backed securities to investors on the open market. This secondary mortgage market helps to replenish the supply of lendable money for mortgages and ensures that money continues to be available for new home purchases. The name "Fannie Mae" is a creative acronym-portmanteau of the company's full name that has been adopted officially for ease of identification.

History

In 1968, the Federal National Mortgage Association was partitioned into two separate entities—one wholly owned by the government and known as the Government National Mortgage Association (Ginnie Mae), and the other to retain the name Federal National Mortgage Association (Fannie Mae). At this time, Fannie Mae expanded its charter to buying other sorts of mortgages besides the government-insured ones it had traditionally purchased. Fannie Mae became fully private in 1970 [1].

Business

Fannie Mae is a consistently profitable corporation. While it receives no direct government funding or backing, it has certain looser restrictions placed on its activities than normal financial institutions. For example, it is allowed to sell mortgage backed securities with half the capital backing them up than is required by other financial institutions. Critics, including Alan Greenspan, say that this is only allowed because investors seem to think that there is a hidden, or implied, guarantee to the bonds that Fannie Mae sells ([2]). Although the company describes them as having no guarantee, nevertheless the vast majority of investors believe that the Government would prevent them from defaulting on their debt, and so buy bonds at very low interest rates as compared to others having like risk.

The largest mortgage originator in the United States is Countrywide Financial, which is an almost exclusive Fannie Mae partner, although they have sold small amounts to government sponsored enterprise (GSE) competitors. Their "loan production" during 2003 was $434.9 billion, of which most was sold to Fannie Mae.

While Mortgage Originators can securitize and sell the mortgages themselves, GSEs can leverage their balance sheet further, receive lower rates on both assets and liabilities, and have a record of packaging and selling mortgages with greater success.

Conforming loans

Because of its stake in the mortgage market and because of its history, Fannie Mae (along with Freddie Mac) sets the limit each year on the size of a conforming loan based on the October to October changes in mean home price, above which a mortgage is considered a jumbo loan, and has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for non-conforming loans much less. By virtue of the laws of supply and demand, then, it is harder for lenders to sell the loans, thus it would cost more to the consumers (typically 1/4 to 1/2 of a percent.) The conforming loan limit is 50 percent higher in Alaska, Hawaii, Guam and the US Virgin Islands.

Financials

FNMA is a financial corporation which uses derivatives to "hedge" their cash flow. Derivative products they use include interest rate swaps and options to enter interest rate swaps ("pay-fixed swaps", "receive-fixed swaps", "basis swaps", "caps and swaptions", "forward starting swaps"). Here's a guide through some of its financials and accounting.

* Article about its accounting: Barron's: Fannie Mae faces more income issues - Banks - Financial - Real Estate - Financial Services - General

* SEC filings: SEC - Company Information SEC EDGAR - 10-K 2003 (EDGAR Online) (FNM: SEC Filings for FANNIE MAE - Yahoo! Finance) (Investor Relations: SEC Filings)

"transfer negative numbers to its balance sheet under "accumulated other comprehensive income," or AOCI." (Page 123 - "Balance Sheets" - "Stockholders? Equity" - "Accumulated other comprehensive loss") ([3])

"2002 earnings of $6.4 billion would have been overwhelmed by $8.9 billion in cash-flow hedging losses." (Page 124 - "Accumulated Other Comprehensive Income (Loss)" - "Net cash flow hedging losses on derivatives hedging debt").

"$3 billion in losses that were recognized in 2002-2003" (Page 122 - "Statements of Income" - "Other expenses" - "Debt extinguishments, net").

"$19 billion paid to settle underwater interest-rate swaps in those years." (Page 125 - "Cash-Flows" - "Cash flows from (used in) financing activities" - "Net payments to purchase or settle hedge instruments").

"interest rate swaps on its books rose from $23 billion in 2002 to $149 billion in 2003." (Page 79 - Table 30 "Cash flow hedges" - "Receive-fixed swaps").

"exclude its AOCI numbers from the calculations of capital" (Page 158 - "Core capital" is "Stockholders' Equity" excluding AOCI).

Duration gap

Main article: duration gap

* UPDATE - Fannie Mae average duration gap widens in April

"The company said that in April its average duration gap widened to plus 3 months in April from zero in March." "The Washington-based company aims to keep its duration gap between minus 6 months to plus 6 months. From September 2003 to March, the gap has run between plus to minus one month."

* 17-May-04 8-K Regulation FD Disclosure
* Effective Duration Gap (months)
o July 2003: 6
o April 2004: 3

* Hussman Funds - Freight Trains and Steep Curves

"last summer's 5-month ?duration mismatch? cost Fannie nearly a year of earnings."

Accounting scandal

In late 2004, Fannie Mae was under investigation for its accounting practices. The Office of Federal Housing Enterprise Oversight released this September 17, 2004 report alleging widespread accounting errors, including shifting of losses so senior executives could earn bonuses from making earnings targets. The difficulty centered around how to account for various interest rate hedges Fannie Mae buys as part of its risk management strategy. When Fannie Mae did not release its third quarter results for 2004, doubts increased.

Supporters of the company, including senior management, said the problem was merely a disagreement over FASB accounting standards, but in December, the U.S. Securities and Exchange Commission ruled that Fannie Mae would have to restate the past 3 1/2 years of earnings, potentially losing $9 billion of earnings over that timeframe, and possibly necessitating increased capitalization.

This has not yet impacted the stock price for Fannie Mae, but Moody's and Standard & Poor's have downgraded Fannie Mae's subordinate debt. Given the large percentage of the American economy that is tied up in housing values, a major scandal involving Fannie Mae could be highly damaging to investor confidence. However, Freddie Mac was able to overcome its summer 2003 scandal without serious damage.

On December 21, 2004, CEO Franklin Raines and CFO Timothy Howard were forced to resign. The company also dismissed its auditor, KPMG.

In testimony given to the U.S. Senate Banking Committee April 19-21, 2005, it became clear that Congress, with support from all the parties, was planning to strengthen oversight of all the GSEs. A contentious issue in the second quarter of 2005 was whether the retained portfolios of Fannie and Freddie should be reduced. This issue became prominent after an April 26, 2005 AEI symposium, and continued to gain ground leading up to Alan Greenspan's major May 19, 2005 speech recommending strict portfolio limits.

Management

* Chairman: Stephen B. Ashley
* CEO: Daniel H. (Dan) Mudd
* CFO: Robert J. (Rob) Levin

Analysts

* Moshe Orenbuch (Credit Suisse First Boston)
* Robert Napoli (Piper Jaffray)
* Paul Miller (Friedman, Billings, Ramsey & Co.)
* Matthew Park (A. G. Edwards & Sons, Inc.)
* Bradley Ball (Prudential Financial)

Conference calls

* July 21, 2004 - 2nd Quarter 2004 (presentation) (audio)

Awards

Fannie Mae received a 71% rating in the 2004 Corporate Equality Index by the Human Rights Campaign. Additionally, the company gave a $50,000 grant to the anti-LGBT organization Traditional Values Coalition in 2001 to "to train church leaders to provide homeownership education in the Greater Los Angeles area."

Fannie Mae was named one of the 100 Best Companies for Working Mothers in 2004 by Working Mothers magazine

 

 

 

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Gulf Shores and Orange Beach Area Info

Climate
The Gulf Coast Area has a mild climate with an average annual temperature of 67.4 degrees. The average temperature in January is 51.4 degrees. The average temperature in July is 81.8 degrees. The average annual precipitation is 67 inches, and the growing season is 292 days.

Education
Education is a fundamental block in building a bright future. The Gulf Coast Area opened a brand new high school during 1999 in Gulf Shores (ph. 251.968.4747). The area has two elementary schools; they are Gulf Shores Elementary (ph. 251.968.7375) and Orange Beach Elementary (ph. 251.981.5662). Gulf Shores Middle School (ph. 251.968.8719) offers an excellent curriculum in preparation for high school. All public schools are part of the Baldwin County school system. If you are interested in private education, you also have the option of Bayside Academy (ph. 251.955.5211), which includes age 3yrs – Grade 4.

Healthcare
The nearest hospital is South Baldwin Regional Medical Center (ph. 800.580.3627) located in Foley. South Baldwin Medical Center offers 24-hour emergency services (ph. 251.952.3400). Numerous medical professionals practice in the area providing both family practice and specialized care.

Airports
Corporate and Private air service is available in Gulf Shores from the Jack Edwards Municipal Airport, with a full Instrument Landing System and the longest paved runway being 7000 feet. The closest commercial air service is available in Pensacola, roughly 30 miles away, at the Pensacola Regional Airport (ph. 850.435.1746). Major carriers serving the airport are Continental, US Airways, Delta, Northwest, and American. Other commercial airports are located in Mobile (ph. 251.633.0313) and Gulf Port, Mississippi (ph. 228.863.5951).

Shopping
The area offers many shops ranging from casual apparel and beachwear to upscale fashion and specialty boutiques. If you are a bargain hunter, you can find 120 factory outlet stores in Foley.

Parks and Recreation
The nearest state park is the Gulf State Park (ph. 251.948.7275). The 6,000-acre park area offers campsites, picnic areas, 18-hole golf course, 825 foot fishing pier, 144 room hotel and convention center. Other parks in the area include Bon Secour Wildlife Refuge (ph. 251.540.7720), Meyer Park (ph. 251.968.4420), Johnnie Sims Park and Kids Park (ph. 251.968.4420), and Wade Ward Nature Park (ph. 251.968.4420).

State/Local Income Tax
For detailed information about Alabama income tax, contact the Alabama Department of Revenue, Individual and Corporate Tax Division (ph. 251.242.1000). In most instances, local governments in Alabama do not levy city, town, or county income taxes.

Property Taxes
Property (Ad Valorem) taxes are taxes on real business and/or personal property. “Ad Valorem” means “according to value”. For details, call the Revenue Commissioner’s office (ph. 251.943.5061, ext. 2840).