Fannie Mae is not an average housewife who is trying to be on a budget.  Fannie Mae is a “government-sponsored enterprise, created by Congress.”  “Fannie Mae” is her alias.  Her real name is the “Federal National Mortgage Association.”  And, yes, her brother is Freddie Mac or the  Federal Home Loan Mortgage Corporation, also a government-sponsored enterprise.

Fannie Mae’s True Identity

Fannie Mae might sound like a sweet, plump middle-aged lady who wears polka dot dresses and carries an over-sized purse, sort of an Aunt Bee off of the old Andy GriffithTV Show, “Mayberry RFD.

Fannie Mae And Freddie Mac functions partly to make affordable housing available.

Fannie Mae And Freddie Mac: Part of the Federal Govt.?


However, “she” is actually an institution.  Fannie Mae was “born” back in 1938 in the time of the Great Depression.  And she owes her existence to the New Deal.

Here at Palm State Mortgage Company, we are certain you have heard of her.  But, you might not understand her job.  Let’s define what she does:

1.   First and foremost, Fannie Mae “serves to stimulate homeownership.  She creates a secondary market which expands the liquidity of mortgage money secondary mortgage market

2.   The Company strives to increase the availability and affordability of homeownership for low- moderate and middle-income Americans.

3.   What Fannie does not do is originate loans or provide mortgages to borrowers.  “As a secondary market participant, Fannie Mae “keeps funds flowing to mortgage lenders (e.g., credit unions, local and national banks, thrifts and other financial institutions) through the purchase and guaranty of mortgages made by these firms.” You guessed it, Fannie is… “One of two of the largest purchasers of mortgages on the secondary market.  The other is Freddie Mac.

Fannie Mae Needs Money To Keep Going-Why?

Fannie Mae had to report a net loss of $6.5 billion in the 4th quarter of 2017.  Not since 2012 has the situation been so serious for the government-sponsored enterprise.  The company needs money from the government for the first time since 2012.

Fannie and Freddie Mac are now allowed to hold no more than $3 billion in losses.

However, Fannie’s $6.5 billion in losses number translates into Fannie Mae’s pending request for a draw from the treasury in the amount of $3.7 billion.  That amount will eliminate the GSE’s (Government Sponsored Enterprise’s) budget deficit.

Fannie’s Bookkeeping:  How Did This Happen When Things Were Going So Well?

It is true, based on Fannie Mae’s financial records, the company will submit a request for that much needed 3.7 billion dollars. So, what has happened?

1.   Basically, first, Fannie paid her dividends in good faith, because of her estimated profits.

2.   Reports reflected a 2017 net income of $2.5 billion.

3.   This is considerably less than her 2016 income of $12.3 billion in 2016.

4.   Now, Fannie reports a net loss of $6.5billion for the fourth quarter of 2017 and a comprehensive loss of $ 6.7 billion for that same quarter.

5.    And yet, we could see Fannie Mae’s annual pre-tax income for 2017 was $18.4 billion.  This compared well with the previous year’s $18.3 billion. But the new tax code made all the difference, as you shall see below.

Here Comes Fannie’s Pain

Fannie Mae reported a fourth-quarter 2017 net loss of $6.5 billion, compared with net income of $3 billion in the third quarter.

By the way, the company will also request a billion-dollar provision from the Treasury to “eliminate its net worth deficit.”

All of these statistics and numbers are transparent in the earnings report released by Frannie Mae. You can see all the detailed figures at this online resource.

Folks, It’s All About Fannie and the New Corporate Tax Rate

Tax Cuts reportedly were partly to blame for the fund shortage.

Wow! Almost $ 4 Billion Dollars Needed To Keep The Doors Open.

In fact, Fannie Mae predicted that this would happen a year before the government enacted the new tax laws.

As Shakespeare would say, “Herein lies the rub.”

Reports explain, “The new tax law reduced the corporate tax rate from 35% to 21%, the first reduction to that rate in 15 years.”

It isn’t difficult to see that was a big hit.  The 14 percentage points difference ripped through budgets based on prefigured deferred tax assets of 35%.  Now the government had reduced the DTA’s reduced to 21%.

The company’s quarterly report explains that 14% difference impacted each of the GSEs’ deferred tax assets, which include:

A  “deferred fees,
B.  basis differences related to derivative instruments,
C.  mortgage-related assets
and allowance for loan losses.”

So, we have a matter of miscalculation, and it led to a shortage of funds to pay that 14% difference.  According to Housing Wire, “All told, the government provided $187.5 billion in bailout funds to the GSEs since 2008, but that figure remained static from 2012 until now.”

Take-Aways from the Fannie Mae’s Lesson in Corporate Tax Rates

Take-Away One:  A Summary of What Fannie Faced

Taxes – Taxes – Taxes

In summary, we repeat that Fannie and Freddie figured their deferred tax assets, which were based on the old corporate tax rate of 35%.  But, when the new code lowered the DTA’s it to 21%, it meant that they needed to downgrade their DTAs. Basically, there was not enough money in their wallet to cover the difference. Let’s quote from the 4th quarter report:

“The primary driver of changes in the company’s net income for full year 2017 and the fourth quarter of 2017 was a $9.9 billion provision for federal income taxes in the fourth quarter resulting from the remeasurement of the company’s deferred tax assets due to the Tax Cuts and Jobs Act (Tax Act).  As a result, Fannie Mae reported a net worth deficit of $3.7 billion as of December 31, 2017.”

Take-Away Two: Fannie Endures A “One Time Accounting Charge”

Fannie did not perform poorly or encounter scandalous management issues.  For the fourth quarter, her report reveals that she would have made a profit of $3.4 billion in the fourth quarter without the tax issue.

Fannie Mae CEO Timothy Mayopoulos stated,“For the year, Fannie’s net income was $2.5 billion, which again would have been increased by $9.9 billion without the tax write-down.”  He added, “To eliminate the company’s net worth deficit, the company expects the Director of the Federal Housing Finance Agency (FHFA) will submit a request to Treasury on the company’s behalf for $3.7 billion.

Fannie Sees A Brighter Future

Mayopoulos also explained that Fannie Mae’s financial condition and practices remain in good shape.  Here are his final words on the matter:

“Our 2017 results demonstrate that the fundamentals of our business are strong.  While the fourth quarter was affected by a one-time accounting charge, we expect to benefit from a lower tax rate going forward.”

Palm State Mortgage Company sees that new tax laws will have growing pains, and we hope other companies can plan ahead with insight and precision.

Special Bulletin:  Palm State would be remiss if we did not acknowledge the breaking news of yet another tragic shooting in our country and in our state.


We Pray For All The Innocents.


Valentine’s Day will be forever overshadowed with the deaths of 17 people gunned down during a routine day of school at Marjory Stoneman Douglas High School in Parkland, Florida. The hearts at Palm State Mortgage Company are heavy today, as we send our prayers and condolences out to the families and friends of the victims.