Fannie Mae rededicates itself to hedge accounting, multifamily CAS

Fannie Mae identified the adoption of hedge accounting and regular issuance of multifamily Connecticut Avenue Securities deals as among strategies it could continue to pursue while navigating regulatory uncertainties and change.

"While we cannot be certain that the company will exit FHFA conservatorship, the actions we are undertaking position us to be stronger regardless of the outcome of the exit process," Celeste Brown, chief financial officer at Fannie Mae, said during the government-sponsored enterprise's fourth-quarter 2019 earnings call Thursday.

Hedge accounting and more diverse multifamily risk-sharing are among the ways Fannie is looking at strengthening its financial position in line with this aim, she said.

Reducing earnings volatility through hedge accounting is a strategy that could remain attractive if the GSEs exit Federal Housing Finance Agency conservatorship and start operating more like private companies again, and higher levels of risk-sharing also are likely to remain valuable as the FHFA reconsiders what levels of capital the GSEs need to hold to maintain safety and soundness.

Both strategies also are attractive because they could make Fannie more competitive with Freddie Mac.

Freddie adopted hedge accounting in 2017 to smooth out some rate-related earnings volatility and Fannie has shown interest in doing the same, but has been slower to act because it wanted other accounting developments to play out first.

Freddie has received higher levels of multifamily risk-sharing credit from the FHFA for using a structure like CAS, so Fannie — which primarily uses its Delegated Underwriting and Servicing vehicle for multifamily risk-sharing — has diversified its strategies to include CAS deals and insurance transactions to increase the credit it gets.

Fannie generated $4.4 billion of net income in the fourth quarter of 2019, up from $3.2 billion in the fourth quarter of 2018 and from nearly $4 billion in the third quarter of last year. Its results exceeded B. Riley FBR's $3.6 billion forecast for company's quarterly earnings.

The following factors drove Fannie's quarterly results: high prepayment rates that increased in net-interest income from the amortization of upfront fees, an increase in investment gains and a shift to fair-value gains from fair-value losses in the third quarter of 2019. These partly offset a decrease in credit-related income.

For 2019 as a whole, Fannie's net income was $14.2 billion, down from almost $16 billion in 2018. The reduction primarily reflected a shift to fair-value loss from fair-value gains the previous year. The change occurred because there were declining interest rates through most of 2019.

Fannie's net worth was $14.6 billion at the end of 2019's fourth quarter, so it did not return a dividend to the Treasury for the period. Regulators last fall adjusted the earnings Fannie can retain before it returns a divided upward to the amount needed to maintain a net worth of $25 billion.

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