Encouraging Signs for America's $3 Trillion Problem

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For 2012, Fannie Mae reported a $17 billion profit. The juxtaposition of "profit" and "Fannie Mae" probably seems a bit odd. But that is indeed what Fannie's books showed for the year.

The swing from a $17 billion 2011 net loss to the $17 billion 2012 profit was driven primarily by the fact that Fannie had a near-$27 billion provision for loan losses in 2011 versus a benefit of close to $1 billion on that line in 2012. Cynicism could creep in, here -- just as with banks, loan-loss provisions for Fannie are an estimate calculated by the lender.

However, the change in provisions does reflect real, observable data. Charge-offs at Fannie were down around 30% in 2012. The Case-Shiller 20-City home-price index was up 7% for 2012. Some cities particularly hard-hit by the crisis fared even better -- Phoenix prices jumped 23% during the year. Among all U.S. banks, delinquency rates were 10.1% as of December 2012, down from 10.3% the year before, and 11.3% at the beginning of 2010.

Fannie's reversal of fortunes also reflects the fact that the proportion of its balance sheet mired in pre-2009 muck is trickling away. In its annual report, the company breaks out its 2005 to 2008 loan book as part of its "legacy book of business" as opposed to its more recent vintage "new single-family book of business." The comparison of the two books are striking.

Source: Fannie Mae 10-K. Fannie Maes Bluer SkiesCreate infographics.

It's important to note that the newer loans have had less time to season, which means bad loans have had less time to show their true colors. But the statistics are encouraging nonetheless.

Does that mean that everything is now all candy canes and unicorns for Fannie Mae? Well, no, of course it doesn't. For one thing, Fannie's bloated balance sheet is north of $3 trillion. For sake of comparison, Bank of America has a $2.2 trillion balance sheet, while Citigroup has $1.9 trillion in assets.

But it's not just the size that's at issue here. That Fannie reported a profit for 2012 and has had better loan-performance experience since 2009 is akin to the obese person who's lost 50 pounds or the alcoholic that's been dry for six months. Directionally, Fannie, the overweight person, and the alcoholic are all doing better, but that doesn't mean that the sins from the past can't be repeated. And if there's only change of the "kinda, sorta" variety, the temptation to repeat past mistakes may be more of a question of "when" rather than "if."

In the grand tradition of "out of sight, out of mind," Fannie gets far less attention now as compared to the likes of B of A and Citi. But if we looking back to 2006, Fannie's balance sheet leverage -- not including giant trusts that have since been consolidated -- was above 20-to-1. B of A was at less than 11-to-1, while Citi was levered at about 16-to-1.

It's good to see Fannie's fortunes turning, even if the provisions reversal makes it hard to count on profits that sizable going forward. It will be even better if future profits can chip away at the giant pile of money that's been shoveled into the lender by the government.

But giant 2012 profit or not, the ol' head-in-the-sand act when it comes to Fannie isn't going to cut it. We need a real plan to address the future of Fannie.

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The article Encouraging Signs for America's $3 Trillion Problem originally appeared on Fool.com.

Matt Koppenheffer owns shares of Bank of America. The Motley Fool owns shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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