Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) profit declined 80% $1.3 billion in 4Q2014. It will pay $1.9billion check to the Treasury in March. It is the smallest payment since 2Q2010. The long-term interest rates declined in the quarter that significantly reduced the value of the hedging derivative contracts. It indicated that low capital buffers are resulting in high risk passing burden of payment to taxpayers.
Tim Mayopoulos, the CEO of Federal National, said that as Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) has smaller cushion to absorb losses, it might have to turn to Treasury for assistance. Fannie Mae and Freddie Mac both were bailed out by the U.S. government at the peak of the financial crisis in 2008. As per the terms of bailout, the two companies are required to sweep their gains into the Treasury. It is a much-debated provision and is also being challenged in court by investors.
The rising interest rates
The financial gains of both Federal National and Federal Home are largely dependent on financial market. The volatility underscores the risk that the companies could be forced to draw taxpayer funds again. The bailout guidelines limit how much fund they can hold in treasury reserve. However, Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) can profit if interest rates rise, as it will boost the value of derivatives. It is a much-anticipated outcome in the year as analysts expect the Federal Reserve to hike interest rates by mid of 2015.
The future ahead
Mayopoulos said Federal National expects to remain profitable measured on an annual basis. The changes in interest rates can result in wild swings in quarterly results. The overall concern is related to interest rates. If the situation worsens, it will put pressure on Congress and the Obama administration to overhaul housing finance laws. Taxpayers pumped $71.3 billion into Freddie Mac after the U.S. housing market collapse while Fannie Mae was propped up with $116.1 billion.