The Federal National Mortgage Corp. (Fannie Mae) yesterday reported 1985 net income of $36.9 million (52 cents a share), a dramatic improvement over its $57.4 million loss in 1984.
Chairman David O. Maxwell predicted in a telephone interview yesterday that Fannie Mae's profitability would improve again in 1986, barring an unexpected jump in interest rates or a sharp downturn in the economy.
Maxwell also said Fannie Mae's financial strategy, which involves closely matching the maturity dates of assets and liabilities, is an important part of the Washington-based firm's long-run turnaround.
"It was a watershed year for Fannie Mae," Maxwell said. "Our earnings reflect the favorable interest rate environment in 1985 and the growing success of the long-term strategies we put in place to restructure Fannie Mae and turn around a company that was losing as much as $1 million a day in 1981. We're looking forward to another profitable year in 1986, and we expect higher earnings."
Fannie Mae is a congressionally chartered, privately owned corporation that makes a secondary market in mortgages. It buys mortgages from lenders so they can make new loans, and raises money in the capital markets by selling notes, including mortgage-backed securities.
Fannie Mae had significant losses in the early 1980s when interest rates suddenly rose, forcing it to pay more for capital than it was getting from the long-term fixed-rate mortgages it was holding. Maxwell said yesterday that the restructuring of Fannie Mae's portfolio, designed to protect against a repeat of the losses in the early 1980s, cost $115 million in 1985.
"An interesting figure is that we spent $115 million in 1985 on restructuring," Maxwell said. "If we had followed the more traditional route and borrowed at three years average maturity, the increase in net earnings in 1985 would have been $115 million. But we chose to lengthen our debt to over six years average maturity because Fannie Mae got in trouble lending long and borrowing short before. We are trying to match the maturity of assets with our debt."
Maxwell said that although he does not expect Congress to approve the measure, Fannie Mae remains threatened by a Reagan administration proposal that would require it to pay an annual fee to the Treasury on its borrowings. Maxwell said the Reagan administration has estimated that the fee would cost Fannie Mae more than $1 billion over five years.
"This would have a very devastating effect if it were adopted," Maxwell said. "I don't expect it to pass because it is completely mistaken and unwise. Congress rejected this 'housing tax' last year, and I expect they will do so again."
Maxwell said the relatively high level of foreclosure losses is a continuing problem for Fannie Mae.
"Our system to dispose of the foreclosed properties we acquire is working well," Maxwell said. "Unfortunately, we are acquiring additonal foreclosed properties at virtually the same rate as we are disposing of others."
Fannie Mae's 1985 fourth quarter was the first full quarter with a positive interest rate spread on its portfolio since the fourth quarter of 1979. Overall in the fourth quarter, the company had net income of $20.5 million (28 cents a share), versus a loss of $31.2 million in the fourth quarter of 1984.