Fannie Mae Posts Loss Despite Business Boom
PUBLISHED CORRECTIONS: The headline on a July 16 Business article about Fannie Mae's second-quarter results was incorrect. The company reported a profit for the quarter. (Published 7/17/03)</br></br>Fannie Mae reported a big drop in second-quarter earnings due to changes in the value of derivatives contracts, even though its business expanded significantly. The mortgage-finance giant also said that it will reduce its interest rate risk and that it will be less profitable in the second half of the year.</br></br>The Washington-based firm, the biggest buyer of home mortgages, said the total volume of its business -- the amount of mortgages it owns plus the value of the mortgage-backed securities it has issued or guaranteed -- grew 29 percent in the second quarter as homeowners refinanced at record levels. But declining interest rates triggered a paper loss of $1.9 billion on Fannie Mae's portfolio of derivatives. The company said its "core business earnings," which exclude these paper losses, grew substantially.</br></br>Fannie Mae earned $1.1 billion ($1.09 cents a share) in the three months ended June 30, down from $1.46 billion ($1.44) in the same quarter of 2002. Not including the accounting impact of the paper loss on its derivatives, which Fannie Mae uses to hedge against the risk of interest rate swings, the company said would have earned $1.86 billion in the quarter, compared with $1.57 billion a year earlier.</br></br>Fannie said core business earnings better reflect the economic reality of its performance because the losses booked on its derivatives -- accounting rules require it to carry interest rate hedges at market value -- are not realized. The "mark to market" accounting rule, since it was established in January 2001, has caused wide swings in the reported net income of Fannie Mae and its smaller rival, Freddie Mac.