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Federal National Mortgage Association (NYSE: FNM)

Federal National Mortgage Association (FNM), also known as “Fannie Mae,” is a government-sponsored enterprise (GSE) chartered by the U.S. Congress to support liquidity and stability in the secondary mortgage market, where mortgage loans are purchased and sold. The Company participates in the secondary mortgage market by purchasing mortgage loans and mortgage-related securities for its mortgage portfolio. It also makes other investments that increase the supply of affordable housing. The Company is organized in three business segments: Single-Family Credit Guaranty, Housing and Community Development (HCD) and Capital Markets. The Single-Family Credit Guaranty segment securitizes single-family mortgage loans into Fannie Mae mortgage-backed securities (MBS) and facilitates the purchase of single-family mortgage loans for the Company’s mortgage portfolio. The Housing and Community Development segment securitizes multifamily mortgage loans into Fannie Mae MBS and facilitates the purchase of multifamily mortgage loans for the Company’s mortgage portfolio. This segment also invests in rental and for-sale housing projects. The Capital Markets segment manages the Company’s investment activity in mortgage loans, mortgage-related securities, debt financing activity, and liquidity and capital positions. The Company’s customers include mortgage banking companies, savings and loan associations, savings banks, commercial banks, credit unions, community banks, insurance companies, and state and local housing finance agencies.

Fannie Mae was founded in 1938 and is based in Washington, the District of Columbia.

Source: Reuters.com, SEC Filings.

Financial Summary

FNM reported a net loss of $11.5 billion in the first quarter of 2010, compared with a net loss of $15.2 billion in the fourth quarter of 2009. Including $1.5 billion of dividends on senior preferred stock held by the U.S. Department of Treasury, the net loss attributable to common stockholders was $13.1 billion, or ($2.29) per diluted share, compared with a loss of $16.3 billion, or ($2.87) per diluted share, in the fourth quarter of 2009. First-quarter results were driven primarily by credit-related expenses, which remain at elevated levels due to weaknesses in the economy and the housing market.

The first-quarter loss resulted in a net worth deficit of $8.4 billion as of March 31, 2010, taking into account a $3.3 billion reduction in deficit related to the adoption of new accounting standards, as well as unrealized gains on available-for-sale securities during the first quarter. The acting director of the Federal Housing Finance Agency has therefore asked Treasury to provide FMN $8.4 billion on or prior to June 30, 2010.

During the first quarter of 2010, FNM purchased or guaranteed an estimated $191.4 billion in loans, measured by unpaid principal balance, including approximately $40 billion in delinquent loans purchased in March from mortgage-backed securities trusts. Not including the delinquent-loan purchases, FNM’s purchases and guarantees financed approximately 516,000 conventional single-family loans, and approximately 61,000 multifamily units. Estimated market share of new single-family mortgage-related securities issuances was 40.8% in the first quarter of 2010, compared with 38.9% in the fourth quarter of 2009. FNM’s mortgage credit book of business was $3.18 trillion as of March 31, 2010, compared with $3.23 trillion as of December 31, 2009.

FNM has maintained pricing and eligibility standards that promote sustainable home ownership and stability in the housing market, and the risk profile of the loans it acquired remained strong. For single-family loan acquisitions in the first quarter of 2010, the weighted average original loan-to-value ratio was 69% and the weighted average FICO credit score was 758. That was consistent with 2009 single-family loan acquisitions, which had a weighted average original loan-to-value ratio of 67% and a weighted average FICO credit score of 761. The ultimate performance of these and all loans will be affected by macroeconomic trends, including unemployment, the economy and home prices.

MBS CONSOLIDATION

The Financial Accounting Standards Board last year issued new accounting standards that govern the transfer of financial assets and the consolidation of variable interest entities. FNM prospectively adopted these new accounting standards and are reporting under them for the first time in its first-quarter 2010 condensed consolidated financial statements.

Implementation of these standards constitutes a fundamental change in the basis of presentation of FNM’s consolidated financial statements, primarily because the standards require it to consolidate the substantial majority of MBS trusts. As a result, the trusts’ underlying assets (principally mortgage loans) and liabilities held by third parties (principally MBS certificates issued by the trusts) are now recorded on its condensed consolidated balance sheets. These new accounting standards do not change the economic risk to FNM’s business, specifically its exposure to liquidity, credit and interest rate risks.

Balance Sheets

The balance sheets reflect several changes related to the new accounting standards, including:

• A significant increase in loans and debt and a decrease in trading and available-for-sale securities.
• Separate presentation of the elements of the consolidated MBS trusts (such as mortgage loans, debt, accrued interest receivable and payable) on the face of the condensed consolidated balance sheets.
• Significant increase in allowance for loan losses and significant decrease in reserve for guaranty losses.
• Elimination of substantially all previously recorded guaranty assets and guaranty obligations.

Statements of Operations

Statements of operations reflect several changes related to the new accounting standards, including:

• A significant increase in interest income and interest expense attributable to the assets and liabilities of the consolidated MBS trusts, and a separate presentation of the elements of the consolidated MBS trusts (interest income and interest expense) on the face of condensed consolidated statements of operations.
• Reclassification of the substantial majority of guaranty fee income and trust management income to interest income.
• A decrease to the provision for credit losses (which consists of the provision for loan losses and provision for guaranty losses) and a corresponding decrease in net interest income due to recognizing interest expense on the debt of consolidated MBS trusts and not accruing interest income on underlying nonperforming consolidated loans.
• Elimination of fair value losses on credit-impaired loans acquired from MBS trusts FNM has consolidated, as the underlying loans in the MBS trusts are already recognized in the condensed consolidated balance sheets.
• FNM’s portfolio securitization transactions that reflect transfers of assets to consolidated MBS trusts do not qualify as sales, thereby reducing the amount it recognizes as portfolio securitization gains and losses. FNM also no longer recognizes gains or losses on the sale from its portfolio of available-for-sale MBS securities that were issued by consolidated MBS trusts, because these securities are eliminated in consolidation.
• FNM no longer recognizes fair value gains or losses on trading MBS that were issued by consolidated MBS trusts, which reduces the amount of securities subject to recognition of changes in fair value in the condensed consolidated statements of operations.

Source: Reuters.com, SEC Filings.

Analyst Consensus

This is the consensus forecast amongst two polled investment analysts. Against the Federal National Mortgage Association (Fannie Mae) company.

Source: www.ft.com

Consensus Estimates Analysis

Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=FNM

Investment Highlights

Barclays Capital Inc., Deutsche Bank Securities Inc. and J.P. Morgan & Co. are the joint lead managers. The co-managers include, Banc of America Securities, CastleOak Securities L.P., Citigroup Global Markets Inc., FTN Financial Capital Markets, Goldman Sachs & Co. and UBS Securities LLC.

Source: http://www.fanniemae.com/kb/index?page=home

Technical Analysis

Source: http://stockcharts.com

FNM is below its 13-day moving average. This bearish sign is even more significant because the moving average is also trending lower.

FNM is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

FNM’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below zero, which suggests that the underlying moving averages are bearish.

Comparative Analysis

Source: Thomson Financial

http://www.thomson.com/financial/financial.jsp

Insider Trading Activity

http://www.thomson.com/financial/financial.jsp

Source: Yahoo Finance

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