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Fannie Mae Reports Record Third Quarter 2001 Financial Results

Operating Net Income of $1.377 Billion up 22.5 Percent over Third Quarter 2000; Operating Earnings Per Diluted Common Share of $1.33 up 22.0 Percent

October 15, 2001

WASHINGTON, DC -- Fannie Mae (FNM: NYSE), the nation's largest source of financing for home mortgages, today reported operating net income for the third quarter of 2001 of $1.377 billion, or $1.33 per diluted common share. Operating net income was 22.5 percent above the third quarter of 2000, while operating earnings per diluted common share rose 22.0 percent over the same period.

For the first nine months of 2001 Fannie Mae's operating net income was $3.929 billion, or $3.80 per diluted common share, compared with $3.283 billion, or $3.16 per diluted common share, for the same period in 2000. Fannie Mae's operating EPS for the first nine months of 2001 were 20.3 percent above the first nine months of 2000.

Third Quarter Nine Months Ended Sept 30
2001
2000
Change
2001
2000
Change
Operating Net Income (in billions)
$1.377
$1.124
22.5%
$3.929
$3.283
19.7%
Operating EPS (in dollars)
$1.33
$1.09
22.0%
$3.80
$3.16
20.3%

Operating net income and operating earnings per common share exclude the variability in the market value of purchased options and the one-time cumulative change in accounting principle which resulted from the implementation of Financial Accounting Standard 133 (FAS 133) on January 1, 2001. Net income and EPS for the third quarter of 2001, including FAS 133 market value changes, were $1.230 billion and $1.19, respectively. Net income and EPS for the nine months ended September 30, 2001 including FAS 133 items were $3.925 billion and $3.80, respectively.

Highlights of Fannie Mae's third quarter 2001 performance include:

  • Taxable-equivalent revenue growth of 30.6 percent versus the third quarter of 2000.
  • Annualized book of business growth of 19.9 percent for the quarter and 19.7 percent year-to-date.
  • A net interest margin of 1.10 percent versus 1.00 percent in the third quarter of 2000.
  • Credit-related losses of $18.7 million compared with $19.5 million in the third quarter of 2000.
  • Losses on debt repurchases and calls of $134.5 million after tax.

Franklin D. Raines, Fannie Mae's Chairman and Chief Executive Officer, said, "Fannie Mae and the residential housing sector have provided an unprecedented amount of support to the economy during this exceptionally challenging time." Raines said that Fannie Mae's combined business volume of $430 billion in portfolio purchases and mortgage-backed security issues during the first three quarters of 2001 already have exceeded the annual total for any previous year. Raines added, "Fannie Mae's record provision of liquidity to the nation's mortgage markets has helped the housing sector inject $40 billion in economic stimulus so far this year. With interest rates again declining, mortgage refinancings should give a further boost to the sagging economy in the months ahead."

Raines noted that the strong growth in Fannie Mae's business volume during the third quarter had combined with a rising net interest margin to produce growth in taxable-equivalent revenue of over 30 percent compared with the third quarter of 2000. Raines also said that in spite of the slowing economy the company's credit losses, at $18.7 million, were lower in the third quarter of 2001 than in the third quarter of 2000.

Timothy Howard, Fannie Mae's Executive Vice President and Chief Financial Officer, said that the company's net interest margin averaged 110 basis points in the third quarter, and rose to 113 basis points in September. Howard said that this year's sharp declines in short-term interest rates in response to aggressive policy accommodation by the Federal Reserve had allowed the company to quickly call debt in amounts that substantially exceeded the timing and volume of mortgage liquidations. Howard said that much of this debt was reissued with short-term maturities in anticipation of a subsequent rise in mortgage repayments, and that with short-term rates declining markedly throughout the year, Fannie Mae's interest margin had experienced a temporary benefit as a result.

Howard said that the additional Federal Reserve easings in response to the events of September 11 would cause the company's short-term debt costs to continue to fall in the fourth quarter, leading to further increases in the interest margin through the end of the year. Howard noted, however, that as the volume of mortgage liquidations grows over the next several months, much of the company's low-cost short-term debt that had been added since the first quarter of 2001 would be paid off. As this occurred, Howard said, the margin would move back toward more normal levels.

Howard added that the surge in net interest income that resulted from the temporary increase in the net interest margin this year had given the company a valuable opportunity to repurchase certain debt issues that were trading at historically wide spreads to other fixed-income securities. Howard said that Fannie Mae repurchased $5.7 billion in high-coupon debt during the third quarter, resulting in an after-tax loss of $122.3 million. Howard noted that the company had repurchased $9.0 billion of high-coupon debt since the beginning of the year, at an after-tax loss of $217.8 million.

Details of Fannie Mae's third quarter financial performance follow.

Business volume
Fannie Mae's business volume – mortgages purchased for portfolio plus mortgage-backed security (MBS) issues acquired by other investors – totaled $158.8 billion in the third quarter of 2001, a 137 percent increase compared with the $66.9 billion in business volume in the third quarter of 2000. Business volume in the second quarter of 2001 was $165.7 billion. Business volume for the first nine months of 2001, at $430.1 billion, was more than double the $179.6 billion for the first nine months of 2000. The third quarter's business volume consisted of $64.2 billion in portfolio purchases and $94.6 billion in MBS issues acquired by investors other than Fannie Mae's portfolio. Retained commitments to purchase mortgages were $54.1 billion in the third quarter of 2001 compared with $45.7 billion in the third quarter of 2000. Retained commitments in September, at $16.4 billion, were held down by the interruptions in financial market activity in the days following September 11.

Fannie Mae's combined book of business -- the net mortgage portfolio and outstanding MBS held by investors other than Fannie Mae's portfolio -- grew at a compound annual rate of 19.9 percent during the third quarter of 2001, ending the period at $1.504 trillion. This growth was fueled by a 15.2 percent annualized growth rate in the net mortgage portfolio to $686.8 billion and a 24.1 percent rate of growth in outstanding MBS to $816.7 billion at September 30, 2001. For the first nine months of 2001 the combined book of business grew at an annual rate of 19.7 percent.

Portfolio investment business results
Fannie Mae's portfolio investment business manages the interest rate risk of the company's mortgage portfolio and other investments. The results of this business are largely reflected in adjusted net interest income, which is net interest income less the amortization of purchased options expense. Adjusted net interest income was $1.892 billion in the third quarter of 2001, or 32.5 percent above the third quarter of 2000. This increase was driven by a 19.7 percent rise in the average net investment balance and a 10 basis point increase in the average net interest margin. Adjusted net interest income for the first nine months of 2001 was $5.335 billion, up 27.4 percent from $4.188 billion during the comparable period in 2000.

Fannie Mae's net investment balance -- consisting of the net mortgage portfolio and the company's liquid investments -- averaged $731 billion during the third quarter of 2001 compared with $611 billion during the third quarter of 2000. The net investment balance was $747 billion at September 30, 2001.

The company's average net interest margin was 110 basis points in the third quarter of 2001 compared with 100 basis points in the third quarter of 2000 and 109 basis points in the second quarter of 2001. The company's net interest margin has benefited temporarily from the continued decline in short-term interest rates. Although most of Fannie Mae's short-term or variable-rate debt has some form of protection against a rise in interest rates, its interest costs have declined as rates have fallen. The company also continues to benefit from attractive spreads on new mortgage purchases. The company's net interest margin has averaged 107 basis points year-to-date, up from 101 basis points for the same period last year.

Fannie Mae's net mortgage portfolio grew at an annual rate of 15.2 percent during the third quarter of 2001 compared with a 16.5 percent rate in the third quarter of 2000 and a 14.6 percent rate during the second quarter of 2001. For the first nine months of 2001 the mortgage portfolio grew at a 17.8 percent annualized rate. September's portfolio growth rate of 5.0 percent was slowed by the company's decision to delay, until later months, settlements of commitments to purchase mortgages scheduled for September delivery. Some of these delayed settlements were done in response to favorable financial terms, while others were done at no cost to the company as accommodations to lenders having difficulty settling trades in the wake of the September 11 attacks. Outstanding mandatory delivery commitments to purchase mortgages were $29.0 billion on September 30, 2001.

In the third quarter of 2001 the company realized net losses from repurchases and debt calls of $206.7 million ($134.5million after tax). Developments in the agency debt market during the quarter made it attractive for the company to repurchase certain maturities of its outstanding debt at prices above par. On four occasions during the quarter the company repurchased higher-coupon debt totaling $5.7 billion, resulting in a loss of $188.2 million ($122.3 million after tax). During the quarter Fannie Mae also had losses of $18.5 million ($12.2 million after tax) on $27.0 billion of debt calls. Year-to-date the company has realized losses on debt repurchases of $335.2 million ($217.8 million after tax) and losses on debt calls of $97.5 million ($63.5 million after tax).

Credit guaranty business results
Fannie Mae's credit guaranty business manages the company's credit risk. The primary indicators of the results of this business are guaranty fee income and credit-related losses. Guaranty fee income was $383.9 million in the third quarter of 2001, a 12.6 percent increase compared with the third quarter of 2000. Guaranty fee income was driven by a 14.7 percent rise in average outstanding MBS, partially offset by a decline in the average effective guaranty fee rate compared with the same quarter last year. The effective guaranty fee rate in the third quarter of 2001 was 19.2 basis points compared with 19.5 basis points in the third quarter of 2000 and 18.9 basis points in the second quarter of 2001. Guaranty fee income for the first nine months of 2001 was $1.084 billion compared with $1.012 billion for the first nine months of 2000.

Credit-related losses -- foreclosed property expense plus charge-off recoveries -- improved despite the slowing economy, totaling $18.7 million compared with $19.5 million in the third quarter of 2000. Foreclosed property expense was $45.1 million in the third quarter of 2001 compared with $51.8 million in the third quarter of 2000. Charge-off recoveries were $26.4 million in the third quarter of 2001 compared with $32.3 million in the third quarter of 2000. Fannie Mae's credit loss rate – credit-related losses as a percentage of the average combined book of business -- was 0.5 basis points in the third quarter of 2001 compared with 0.6 basis points in the year-ago quarter.

Credit-related expense, which includes foreclosed property expense and the provision for losses and is the amount recorded on the company's income statement, totaled $15.1 million in the third quarter of 2001, in line with credit-related losses. Fannie Mae's loss provision was a negative $30.0 million in both the third quarter of 2001 and the third quarter of 2000. The company's allowance for loan losses stood at $807 million at September 30, 2001 compared with $809 million at December 31, 2000 and $811 million at September 30, 2000.

Fee and other income
Fee and other income in the third quarter of 2001 totaled $49.0 million compared with $1.0 million in the same period last year. The change between the third quarters of 2001 and 2000 resulted from higher technology and transaction fees in addition to other miscellaneous items. Fee and other income for the first nine months of 2001 totaled $100.8 million compared with a negative $44.3 million for the first nine months of 2000.

Fee and other income includes technology fees, transaction fees, multifamily fees and other miscellaneous items, and is net of operating losses from certain tax-advantaged investments -- primarily investments in affordable housing which qualify for the low income housing tax credit. Tax credits associated with these investments are recorded in the federal income tax line.

Efficiency
Administrative expenses totaled $272.4 million in the third quarter 2001, up 17.3 percent from the third quarter of 2000. Expenses in the third quarter of 2001 included a $10 million commitment to support victims and families affected by the September 11 tragedy. The company's ratio of administrative expense to the average combined book of business in the third quarter of 2001 was .074 percent. Fannie Mae's efficiency ratio -- administrative expense divided by taxable-equivalent revenue -- was 10.5 percent in the third quarter of 2001 compared with 11.7 percent for the same quarter a year ago.

Capital
Fannie Mae's core capital was $23.8 billion at September 30, 2001 compared with $23.0 billion at June 30, 2001 and $19.9 billion at September 30, 2000. The company repurchased 1.7 million shares of common stock during the third quarter of 2001. Fannie Mae had 999.9 million shares of common stock outstanding as of September 30, 2001 compared with 996.3 million shares as of September 30, 2000. At September 30, 2001 preferred stock made up 9.7 percent of Fannie Mae's core capital.

The company issued $1.0 billion of subordinated debt during the third quarter, bringing year-to-date issues to $4.0 billion. Subordinated debt serves as an important supplement to Fannie Mae's equity capital, although it is not a component of core capital. Earlier this year Fannie Mae announced that by the end of 2003 it would issue sufficient subordinated debt to bring the sum of total capital and outstanding subordinated debt to at least 4 percent of on-balance-sheet assets, after providing adequate capital to support off-balance sheet MBS.

Voluntary disclosures
As part of Fannie Mae's voluntary market discipline, liquidity and safety and soundness initiatives of October 19, 2000, the company now discloses on a quarterly basis its liquid assets as a percent of total assets, the sensitivity of its future credit losses to an immediate 5 percent decline in home prices, and whether it has passed or failed an internal interim version of the risk-based capital stress test based on its interpretation of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.

At September 30, 2001 Fannie Mae's ratio of liquid assets to total assets was 7.8 percent, compared with 8.0 percent at June 30, 2001. The company has committed to maintain a portfolio of high-quality, liquid, non-mortgage securities equal to at least 5 percent of total assets.

At June 30, 2001 Fannie Mae's net sensitivity of future credit losses, taking into account the beneficial effect of credit enhancements, was $332 million. This compares with $307 million at March 31, 2001. The June 30 figure reflects a gross credit loss sensitivity of $1,045 million without the effect of credit enhancements, and is net of projected credit risk sharing proceeds of $713 million.

At both June 30, 2001 and March 31, 2001, the company passed its internal interim risk-based capital test with a capital cushion that exceeded 30 percent of total capital. The company intends to manage its risks so that the cushion between total capital and internally calculated risk-based capital is at least 10 percent of total capital.

Fannie Mae's quarterly disclosures, together with the monthly interest rate risk disclosures which are included with the company's Monthly Summary statistics, are detailed on the fourth page of the attachments to this release. For more information about Fannie Mae's voluntary disclosures, please refer to our web site at http://www.fanniemae.com.

FAS 133
Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities requires that Fannie Mae mark to market only its purchased options and none of its option-based debt or the mortgage investments it hedges with purchased options. The change in the market value of Fannie Mae's purchased options during the third quarter of 2001 was a net loss of $413.1 million. This amount includes $186.9 million in option cost amortization that formerly was included in net interest income and is currently included in adjusted net interest income.

FAS 133 also requires that the company record certain derivatives, primarily interest rate swaps it uses as substitutes for non-callable debt, on the balance sheet at their fair values, with an offsetting entry recorded in a separate component of stockholders' equity called other comprehensive income, or OCI. At September 30, 2001, the OCI component of stockholders' equity included a $10.6 billion reduction, or 1.5 percent of the net mortgage balance. The comparable reduction to OCI was $3.7 billion at June 30, 2001 and $5.7 billion at March 31, 2001. Other comprehensive income is not a component of core capital.

Outlook
Fannie Mae's Executive Vice President and Chief Financial Officer, Timothy Howard, reaffirmed the strong prospects for the company's earnings per share growth in 2001 and noted that the outlook for 2002 had improved. Howard said, "Growth in Fannie Mae's operating earnings per share for the full year 2001 should approximate the 20.3 percent rate of growth reported for the nine months ended September 30. For 2002, recent business developments have increased our confidence that we will be able to meet or exceed the mid-teens growth rates in operating EPS that have characterized the past several years."

Howard also said that credit-related losses were likely to remain low, even with a weakening economy. Howard noted that the company's book of business was backed by homes with an average market value of equity of 42 percent. In addition, Howard said, 36 percent of its mortgages benefited from some form of third-party credit enhancement. Howard added that Fannie Mae's taxable equivalent revenues of $7.3 billion during the first three quarters of 2001 were over one hundred times the $64 million in credit-related losses the company recorded during the same period. "Even were Fannie Mae's credit losses to double over the next five quarters -- which is highly unlikely -- our guidance for earnings per share growth in 2002 would be unaffected," said Howard.

Fannie Mae will host a conference call to discuss it/s third quarter results and the outlook for the remainder of the year and 2002 on Monday, October 15, 2001 at 4:00 p.m. EST. Fannie Mae will provide an audio webcast of the conference call, which interested parties can access from Fannie Mae's Web site. A replay of the conference call will be available on Fannie Mae's Web site for two weeks starting October 15, 2001 at 7:00 p.m. EDT.

MortgageDaily.com
Forward-looking statements
This release includes forward-looking statements based on management's estimates of trends and economic factors in the markets in which Fannie Mae is active as well as the company's business plans. Such estimates and plans may change without notice and future results may vary from expected results if there are significant changes in economic, regulatory, or legislative conditions affecting Fannie Mae or its competitors. Investors should review the most recent Information Statement dated March 31, 2001 and the Supplements dated May 15, 2001 and August 14, 2001 (available at www.fanniemae.com) for a discussion of these factors.

Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Fannie Mae is working to shrink the nation's 'homeownership gaps' through a $2 trillion 'American Dream Commitment' to increase homeownership rates and serve 18 million targeted American families by the end of the decade. Since 1968, Fannie Mae has provided over $3 trillion of mortgage financing for more than 40 million families. More information about Fannie Mae can be found on the Internet at http://www.fanniemae.com.

Benchmark Notes is a registered mark and Benchmark Bonds is a service mark of Fannie Mae. Unauthorized use of these marks are prohibited.

Shareholder information about Fannie Mae is available 24 hours a day. Please call us toll free at 1-800-FNM-2-YOU (1-800-399-2968) or access our Web site.

Contact:
Janis Smith
202.752.6673

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