I saw a recent article posted to this board on how the Deferred Tax Asset worked. The explanation was very thorough in explaining the how the FnF were able to make huge payments to the US Treasury by taking the DTAs in the past few years.
One of the subtle points in the article talked about how the DTA came about because the projected losses were not as great as originally estimated. This is because the losses due to bad mortgages was over forecasted so which gave them an accounting loss on the books that had to be rectified.
Why does this matter? Because they over estimated the loss by over 50 billion dollars in one year. This mean investors were told in those SEC filings that there were far greater losses. Once again we are not talking about a small over estimation. We are talking about a 50 billion dollar error.
It is obvious that the conservator was/is really either inept at accounting or knew there going to be an opportunity to use the DTA.
The other subtle point of the article is that the improvement in FnF results did not come from completely from an expanding housing market...it came from a more stable one housing market. This means they were forecasting a certain amount of defaults on loans that never happened.
This means the improvement banks are seeing by the reduction of the non-performing assets (ie bad loans) is helping FnF far more than just a simple increases in new or existing home sales.
Since FnF were used to buy up a huge amount of Non Performing mortgages the improvements in these assets is going to fuel profits for years to come. Plus, the truly bad mortgages are getting litigated back out to the banks as part of these massive settlements. So when analysts are citing lackluster home sales it really doesn't matter as long as there are sales and they loans being made are better quality. Basically, the real number we should be watching is the reduction in non-performing mortgages whether the property is refinanced or sold to someone else that picks up a mortgage. Here is direct correlation in latest SEC quarter filing pg 6:
"..We continue our efforts to improve the credit performance of our book of business. In addition to acquiring loans with strong credit profiles, as we discuss above in “Strengthening Our Book of Business,” we continue to execute on our strategies for reducing credit losses, such as helping eligible Fannie Mae borrowers with high LTV ratio loans refinance into more sustainable loans through HARP, offering borrowers loan modifications that can significantly reduce their monthly payments, pursuing foreclosure alternatives and managing our real estate owned (“REO”) inventory to minimize costs and maximize sales proceeds. As we work to reduce credit losses, we also seek to assist struggling homeowners, help stabilize communities and support the housing market"
Furthermore as you see the balance of assets on FnF books transition from pre 2008 assets to post 2008 assets you will see profits increase. Why? because of the G-Fees...there are no G-fees on pre-2008 assets. As this turnover happens there will be greater profits coming into the coffers of Fannie Mae. Also, the G-Fees levied on new loans is going up as well further increasing revenues from this turnover of the book of loans from pre2008 mortgages to post2008. How long will this take? I suspect we will see improvement in revenues from this turnover for at least another 5 years as the old book of business is replaced by the new G-Fee model.
Here is cut/paste from pg 4 of the Fannie Mae Quarterly Filing:
"..Beginning in 2008, we took actions to significantly strengthen our underwriting and eligibility standards and change our pricing to promote sustainable homeownership and stability in the housing market. These actions have improved the credit quality of our book of business. Given their strong credit risk profile and based on their performance so far, we expect that in the aggregate the loans we have acquired since January 1, 2009, which comprised 80% of our single-family guaranty book of business as of September 30, 2014, will be profitable over their lifetime, by which we mean that we expect our guaranty fee income on these loans to exceed our credit losses and administrative costs for them. In contrast, we expect that the single- family loans we acquired from 2005 through 2008, in the aggregate, will not be profitable over their lifetime. See “Outlook— Factors that Could Cause Actual Results to be Materially Different from Our Estimates and Expectations” in this report and “Risk Factors” in both this report and our 2013 Form 10-K for a discussion of factors that could cause our expectations regarding the performance of the loans in our single-family book of business to change. For information on certain credit characteristics of our new single-family book of business as compared with our legacy book of business, see “Table 29: Selected Credit Characteristics of Single-Family Conventional Loans Held, by Acquisition Period.” For more information on the credit risk profile of our single-family guaranty book of business, see “Risk Management—Credit Risk Management— Single-Family Mortgage Credit Risk Management,” including “Table 30: Risk Characteristics of Single-Family Conventional Business Volume and Guaranty Book of Business” in that section. ""
