Thanks to a $1.3 billion check from Bank of America, Fannie Mae reported positive net operating earnings of $73 million for the fourth quarter — its first such profit since 2007.
"Our fourth quarter results were favorably impacted by the cash payment received from Bank of America because it reduced our credit-related expenses for the period," the GSE said in a securities filing.
Overall, Fannie lost money in the period because it had to pay a $2.2 billion preferred dividend payment to the U.S. Treasury.
B of A made the payment to settle loan repurchase requests with the GSE. Fannie recognized the cash at yearend 2010, which reduced its losses on charged-off loans and foreclosure expenses to $5.6 billion in the fourth quarter.
For all of 2010, Fannie incurred credit losses totaling $26.6 billion, down from $73.5 billion in 2009.
The $1.3 billion payment also reduced the amount of cash Fannie had to set aside for loss reserves, another turning point for the GSE, which has been under government control since September 2008.
Fannie Mae added only $1.4 billion to its loan loss reserve in 2010, a pile of cash that now totals $66.3 billion. Fannie executives believe the company is now adequately reserved to cover continuing losses on its 'legacy' portfolio of single-family loans that were originated from 2005 through 2008.
The legacy loans represent most of Fannie's credit losses — and 39% of its guaranteed book of business, down from a measurement of 50% at yearend 2009. Loans originated over the past two years represent 40% of the GSE's book of business. "We expect the loans we have acquired in 2009 and 2010 will be profitable," company executives say in the securities filing.
Fannie's single-family business lost $3.6 billion in the fourth quarter of 2010, compared to $26.7 billion for the entire year and $63.8 billion in 2009.
Going forward, Fannie's management seems to like these trends, except for the premiums it is obligated to pay for its line of credit to the U.S. Treasury. "Fannie Mae does not expect to earn profits in excess of its annual dividend obligation to Treasury for an indefinite future," the company said in its fourth quarter earning's press release.
The company is obligated to pay a 10% premium on the $91.2 billion it has drawn from the U.S. Treasury, money it has needed to stay afloat. "As a result of substantial reserving for and realizing our credit losses, we have drawn a significant amount of funds from Treasury. As our draws from Treasury for credit losses abate, we expect our draws to be driven increasingly by dividend payments to Treasury," the GSE says in a securities filing.
