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Fannie Warns on Continuing Interest Margin Pressure.
Washington -- Fannie Mae's profit rose to $6.3 billion in 2005, up almost 28% from $5 billion in 2004, but the company advised that it expects to see 2006 earnings decline when it completes its financial report for last year.
Much of the increase for 2005 reflected lower losses related to the fair value of derivatives that are used to hedge Fannie Mae's interest rate risk, rather than improvement in operating income from its guarantee business or net interest income. Net interest income from Fannie Mae's portfolio actually declined in 2005. Guarantee income was up modestly.
Moreover, Fannie Mae warned that it expects further reductions in net interest income and net interest yield for the 2006 period. Fannie Mae also warned that its administrative expense ballooned to an estimated $3.1 billion last year as the company struggled to remediate its various accounting and control weaknesses and defend itself against litigation.
Fannie Mae said it expects 2006 results to show "continued strength in guarantee fee income" amid moderate increases in the provision for credit losses and a somewhat lower loss related to the fair value of derivatives.
On the positive side, Fannie Mae said it probably will file its 2006 results earlier than had been anticipated. Previously, Fannie Mae had been expected to post 2006 results near the end of this year. Fannie Mae hopes to give investors a clearer sign of when 2006 results will be ready sometime next month.
Many of the market conditions putting downward pressure on Fannie Mae's 2006 margins have persisted into 2007 as well.
Once again, Fannie Mae warned that changes in derivative values will lead to volatility in earnings from quarter-to-quarter and year-to-year. While earnings improved from 2004, the 2005 earnings were substantially below Fannie Mae's restated 2003 profit.
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Source: HighBeam Research, Fannie Warns on Continuing Interest Margin Pressure.