Fannie Mae seeks to maintain 10% growth in cooling market

New mortgages expected to decline 28% from record $2.5 billion in 2002

January 26, 2003|By BLOOMBERG NEWS

NEW YORK - Fannie Mae Chief Executive Officer Franklin D. Raines won high marks from investors for steering the largest buyer of U.S. home mortgages through the sharpest swing in interest rates in two decades last year.

Raines now faces an equally big challenge in keeping the government-sponsored enterprise's earnings growing at the more than 10 percent a year that it has during the past 15 years with the housing market starting to slow.

New mortgage loans likely will fall about 28 percent this year from a record $2.5 billion in 2002, according to the Mortgage Bankers Association of America.

"An extreme decline in rates and a refinance boom has benefited them, and that's going come to an end," said Claude Cody, manager of $3.2 billion at AIM Advisors Inc. in Houston, including shares of Fannie Mae. The prospect of higher interest rates "is something overhanging" the company, he said.

Fannie Mae's fourth-quarter earnings fell 52 percent after a $1.88 billion decline in the value of financial contracts used to hedge against interest rate swings. It was the fourth-straight quarter that earnings have been cut because of a reduction in the value of derivatives.

Even with a decline in mortgage loans this year, Raines is confident the market will grow fast enough and Fannie Mae can increase market share to keep earnings growing as in the past. The company's mortgage portfolio grew 12 percent to $791 billion last year.

"We expect a strong market, it just won't be so far above" the recent average growth, Raines said in an interview.

The company said Tuesday that it was increasing its quarterly dividend 18 percent. The new dividend of 39 cents a share is an increase from the 33 cents a share Fannie Mae has paid in the past four quarters, and will be payable Feb. 25 to shareholders of record Friday, the company said.

Fannie Mae is one of three companies, along with Freddie Mac and the Federal Home Loan Bank system, chartered by the government to promote homeownership by acquiring loans from lenders. Together, the companies own or guarantee about 41 percent of the U.S. mortgage market.

The three make money on the difference between their borrowing costs and returns on the mortgages and mortgage-backed debt in their portfolios.

Critics such as Citigroup Inc. complain that their government charters give the three an unfair advantage by allowing them to borrow more cheaply than other businesses.

Raines, a native of Seattle who turned 54 this month, became CEO of Fannie Mae in January 1999 after serving as a director of the Office of Management and Budget in the Clinton administration. He made $14.9 million in base salary, bonuses and stock options in 2001. His 2002 pay package hasn't been disclosed.

The end of a refinancing wave may help Fannie Mae, some analysts said. A rise in interest rates will stop people from taking out new loans at lower rates, meaning more of Fannie Mae's higher-interest-rate loans will be repaid.

Even so, the high valuation afforded Fannie Mae's shares in the late 1990s may not return soon, some analysts said. Investors who bought Fannie Mae when the company' shares traded at more than 20 times earnings are wary about getting too bullish, said Ken Posner, an analyst at Morgan Stanley.

Fannie Mae's shares trade at about 11.5 times earnings now and have traded at about $69 a share recently.

"Investors know that refinance booms don't continue forever and are more inclined to buy companies that are more geared toward economic recovery," Posner said.

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