Stock Alert for Federal National Mortgage Association (Fannie Mae) (FNMA)

Federal National Mortgage Association (Fannie Mae) (OTCBB: FNMA)

Federal National Mortgage Association (FNMA), 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.

Share Statistics (Jul-8-10)			FY 2007	FY 2008	% Chg	Q4 2008	Q4 2009	% Chg
Symbol	FNMA	Revenue, $Mn	43.4B	22.7B	47.7%	-3.71B	9.26B	349.6%
Current price	$0.246	Gross marg.	8.1%	17.8%	54.5%	n/a	39.8%	n/a
52wk Range:	$2.13-0.22	Oper. margin	-11.5%	-103.3%	798.3%	n/a	-166.5%	n/a
Avg Vol (3m):	n/a	Net margin	-4.6%	-136.1%	2558%	n/a	-163.9%	n/a
Market Cap.	274.60M
Shares Outst.	1.1B	EPS, $	-2.62	-23.88	811.5%	-4.42	-2.58	41.6%

Source: Reuters.com, SEC Filings.

Financial Summary

FNMA 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 FMNA $8.4 billion on or prior to June 30, 2010.

During the first quarter of 2010, FNMA 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, FNMA’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. FNMA’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.

FNMA has maintained pricing and eligibility standards that promote sustainable homeownership 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. FNMA prospectively adopted these new accounting standards and is 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 FNMA’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 FNMA’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 FNMA has consolidated, as the underlying loans in the MBS trusts are already recognized in the condensed consolidated balance sheets.
• FNMA’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. FNMA 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.
• FNMA 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.

Financial Strength (Jul-8-2010)	Company	Industry	Sector	S&P 500
Quick Ratio (MRQ)	–	2.25	4.62	0.76
Current Ratio (MRQ)	–	2.29	8.39	0.91
Long-Term Debt to Equity(MRQ)	–	300.89	104.25	137.30
Total Debt to Equity (MRQ)	–	496.67	276.34	205.26

Source: Reuters.com, SEC Filings.

Analyst Consensus

Buy

Outperform

Hold

Underperform

Sell

No Opinion

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

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	0	2	0	0
4 weeks ago	0	0	0	2	0	0
2 months ago	0	0	0	2	0	0
3 months ago	0	0	0	2	0	0
Last year	0	0	1	0	1	2

Source: www.ft.com

Consensus Estimates Analysis

	# of Estimates	Mean	High	Low	1 Year Ago
EARNINGS (per share)
Year Ending Dec-10	1	-6.90	-6.90	-6.90	–

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

Investment Highlights

FNMA recently announced that its common stock will commence trading on the OTC Bulletin Board under the ticker symbol “FNMA” on Thursday, July 8, 2010.  Fannie Mae preferred stock that was previously listed on the New York Stock Exchange also will be traded on the OTC Bulletin Board under the ticker symbols set forth below. The New York Stock Exchange and the Chicago Stock Exchange suspended trading of Fannie Mae’s common and preferred stock prior to the market open yesterday.

The OTC Bulletin Board is a regulated quotation service that electronically transmits real-time quote, price, and volume information in over-the-counter securities.  Information on the OTC Bulletin Board may be obtained at www.otcbb.com.  Holders of Fannie Mae common or preferred stock are encouraged to contact their brokers or securities intermediaries directly regarding trading on the OTC Bulletin Board.

Fannie Mae Security	Old Ticker Symbol	New Ticker Symbol
Common Stock	FNM	FNMA
Preferred Stock, Series F	FNMPRF	FNMAP
Preferred Stock, Series G	FNMPRG	FNMAO
Preferred Stock, Series H	FNMPRH	FNMAM
Preferred Stock, Series I	FNMPRI	FNMAG
Preferred Stock, Series L	FNMPRL	FNMAN
Preferred Stock, Series M	FNMPRM	FNMAL
Preferred Stock, Series N	FNMPRN	FNMAK
Preferred Stock, Series P	FNMPRP	FNMAH
Preferred Stock, Series Q	FNMPRQ	FNMAI
Preferred Stock, Series R	FNMPRR	FNMAJ
Preferred Stock, Series S	FNMPRS	FNMAS
Preferred Stock, Series T	FNMPRT	FNMAT
Preferred Stock, Series 2008-1	FNA	FANIP

FNMA and Freddie Mac, the mortgage financiers seized by the U.S. government during the financial crisis, have paid $635 million in fees to banks this year, making them Wall Street’s biggest capital markets customers in the first half of 2010, according to recent analysis. FNMA and Freddie are now providing financing for more than 90% of the U.S. mortgage market, following the collapse of the market for bonds backed by private sector mortgages.

FNMA and Freddie fund their activities in two ways – by selling their own debt and by buying mortgages and packaging them into securities sold to investors. In doing so, they pay underwriting fees to banks, which amounted to $635 million in the first half, according to Thomson Reuters analysis.

As a result, FNMA and Freddie ranked first and second respectively in the Thomson Reuters’ ranking of payers of underwriting and advisory fees in the debt and equity capital markets. The two entities have often topped the list of fee-payers in recent years. During 2009, however, FNMA and Freddie had ranked behind banks such as Citigroup, Bank of America and Wells Fargo, Thomson Reuters said.

The way FNMA and Freddie sell debt has not changed in spite of the changes in their status. The U.S. government took control in 2008 but does not explicitly guarantee the debt. Decisions on their longer-term status have been delayed until next year.

Reflecting the huge volume of debt sold by FNMA and Freddie, the fees are lower than those paid by other financial institutions or companies. Lam Nguyen at Freeman Consulting, which analyses fees for Thomson Reuters, said the agencies paid an estimated five to seven basis points in fees. Companies paid 20-80 basis points, with banks paying somewhere in between, he said.

A housing sector without FNMA and Freddie Mac is a possibility, Edward J. DeMarco, director of Federal Housing Finance Agency (FHFA), told CNBC Thursday. Demarco said another future scenario might involve FNMA and Freddie remaining business, but without dependence on the federal government.

DeMarco said success could happen only if an infrastructure is in place that allows private firms to re-enter what is a $10 trillion mortgage market. To date, taxpayers have been on the hook for some $145 billion in losses connected to the troubled housing market. The Congressional Budget Office estimates that figure could grow to $400 billion, and some experts have even put a $1 trillion price tag on those taxpayer-responsible costs.

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

Technical Analysis

Source: http://stockcharts.com

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

FNMA’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, FNMA 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.

The MACD for FNMA currently indicates a strong bearish signal for two reasons. First, the MACD is below the signal line, a 9-day moving average. Second, the MACD is below the critical level of 0, which implies that the underlying moving averages are trending lower.

Comparative Analysis

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Jul-8-2010	symbol	Share, $	$ Mn	2010	2011	2010	2011
Freddie Mac	FRE	0.34	n/a	n/a	n/a	0.01	n/a
Centerline Holding Company	CLNH	0.15	9.13M	n/a	n/a	0.03	n/a
Security National Finance Corp.	SNFCA	2.13	38.24M	n/a	n/a	0.16	n/a
Consumer Financial Services Median			23.68M	n/a	n/a	0.06	n/a
Fannie Mae	FNMA	0.246	274.60M	n/a	n/a	0.01	n/a

Source: Thomson Financial

Insider Trading Activity

NET SHARES PURCHASE ACTIVITY Inside Purchases – Last 6 Months
	Shares	Transaction
Purchases	n/a	n/a
Sales	n/a	n/a
Net Shares Purchased (Sold)	n/a	n/a
Total Insider Shares Held	n/a	n/a
% Net Shares Purchased (Sold)	n/a	n/a

Net Institutional Purchases — Prior Qtr to Latest Qtr
	Shares
Net Shares Purchased (Sold)	n/a
% Change in Institutional Shares Held	n/a

Source: Yahoo Finance

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