FNMA Fannie Mae (QB)

Fannie Mae said profit was halved in the third quarter, as declines in long-term interest rates hurt the value of the mortgage-finance company's derivatives.

Fannie Mae said it expects to send the U.S. Treasury Department $2.2 billion in December.

The company reported a profit of $1.96 billion for the third quarter, down from $3.91 billion a year earlier.

The decline was driven by $2.59 billion in fair-value losses in the quarter, compared with a loss of $207 million in the year-earlier period. The losses stem from changes to the value of the derivatives Fannie Mae uses to manage risk, triggered by decreases in long-term interest rates.

Rival Freddie Mac on Tuesday posted its first quarterly loss in four years, also driven mainly by an accounting discrepancy involving the derivatives the company uses to protect against interest-rate changes. The derivatives are recorded at market value even though some of the hedged assets aren't, which resulted in a discrepancy that Freddie said caused a $1.5 billion hit to earnings.

Over the past few years, rising home prices and lower mortgage defaults have bolstered the profits of Fannie and Freddie.

Now, those benefits are receding, making the companies more susceptible to the need for taxpayer help should the housing market turn south and as the government requires them to wind down their capital reserves.

The companies remain caught between shareholders and civil-rights groups who want to see them freed from government control, a White House that believes the current system is broken, and a Congress that can't come to agreement on what the future system should be.

The government took over Fannie and Freddie in 2008 and eventually infused them with $187.5 billion in bailout money. Since then, the companies have become highly profitable, paying out $239 billion in dividends.

Fannie Mae said it will have sent the Treasury $144.8 billion after the December payment.

In the third quarter, Fannie Mae's net interest income, which includes fees from backing mortgages, grew to $5.59 billion from $5.18 billion a year earlier, driven by higher guaranty fees.

In recent years, a larger portion of Fannie's net interest income has been made up of guaranty fees, rather than interest income earned on its retained mortgage portfolio assets. Fannie said the shift reflects guaranty fee increases implemented in 2012 and shrinking of its retained mortgage portfolio.

Fannie Mae has said it expects its earnings this year and beyond to be "substantially lower" due to the drop in income from its retained mortgage portfolio assets, lower income from resolution agreements, and lower credit-related income.

Write to Chelsey Dulaney at Chelsey.Dulaney@wsj.com

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(END) Dow Jones Newswires

November 05, 2015 08:35 ET (13:35 GMT)

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