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To: Joe Stocks who wrote (59462)	7/15/2002 9:26:13 PM
From: D. K. G.	Respond to of 208838

Fannie Mae's Net Rises 4.4% Despite a Withered Portfolio By PATRICK BARTA Staff Reporter of THE WALL STREET JOURNAL WASHINGTON -- Fannie Mae's net income rose 4.4% in the second quarter, but expansion of the company's mortgage portfolio dropped off considerably, and the company warned of slower growth ahead. The giant government-sponsored mortgage company said second-quarter net income was $1.46 billion, compared with $1.40 billion a year earlier. Earnings per share were $1.44, compared with $1.36. The results included the effects of Financial Accounting Standard 133, or FAS 133, an accounting rule that took effect last year that requires companies to record changes in the market value of their derivatives each quarter. Fannie Mae uses derivatives to hedge some risks associated with owning home loans. The company argues that results including FAS 133 don't accurately portray its true financial position, in part because the rule doesn't require the company to record changes in the market value of some assets. Excluding FAS 133, Fannie Mae earned $1.57 billion, or $1.55 a share, up 20% from $1.31 billion a year earlier. The bigger story for Fannie Mae in the second quarter, however, was the slowdown in the growth of its loan portfolio. Fannie Mae has two basic businesses: It buys loans from lenders to hold in its portfolio, or it wraps home loans into securities for sale to investors on Wall Street. The first business is far more lucrative for the company. In recent months, institutional investors and banks hungry for relatively safe investments have competed with Fannie Mae to purchase mortgages and mortgage-backed securities, making it harder for Fannie Mae to find loans with attractive profit margins. Fannie Mae's net mortgage portfolio grew at an annual rate of 4.9% in the second quarter to a total of $741 billion. In 2001, by comparison, the company's portfolio grew by 16.1%. Portfolio growth slowed even further in June, increasing at an annual rate of just 0.8%. Although the situation will likely reverse itself at some unknown time in the future, "I think it's probably going to get worse before it gets better," said Christopher Buonafede, an analyst at Fox-Pitt, Kelton in New York. Fannie Mae faces other headwinds, including a likely slowdown in the volume of loan originations over the next year, as refinance activity cools from 2001's feverish pace. Timothy Howard, the company's chief financial officer, said growth in operating earnings per share in 2003 should be below the "exceptional" rates of recent quarters. But he said he still expects a "strong financial performance," and added that 2002 growth would be "above the company's very positive long-term" trend. Fannie Mae could face brighter prospects on the political horizon. Late last week, Fannie Mae and its smaller sibling, Freddie Mac, agreed to begin filing financial statements with the Securities and Exchange Commission, a move intended to silence criticism about the companies' financial disclosures. In 4 p.m. trading Monday on the New York Stock Exchange, Fannie Mae shares were up 2.9%, or $2.06, to $72.69. Write to Patrick Barta at patrick.barta@wsj.com Updated July 16, 2002http://online.wsj.com/article/0,,SB1026493886294483560,00.html?mod=home_whats_news_us