Guaranty Book Scale And Leaner Operations Will Support Long Term Earnings Resilience

Catalysts

About Federal National Mortgage Association

Federal National Mortgage Association, commonly known as Fannie Mae, provides liquidity and credit protection to the U.S. housing market through its guaranty and mortgage-backed securities businesses.

What are the underlying business or industry changes driving this perspective?

• The large $4.1 trillion guaranty book and role as the largest guarantor of U.S. residential mortgage debt put the company in a position to benefit as housing finance demand trends support sustained guaranty fee revenue and earnings.
• Ongoing repricing of the guaranty book, with higher average guaranty fees in single family, supports the potential for a firmer net interest margin and can be a tailwind for net revenues.
• Cost reduction actions that lowered noninterest expense and administrative expense ratios, together with continued focus on automation and AI, create room for structurally leaner operations and support net margin and earnings resilience.
• Growth in the retained mortgage portfolio and a shift in the balance sheet mix toward higher yielding investments, alongside steady portfolio income, can influence net interest income and overall profitability.
• Continued build in net worth to $112.7b, progress toward capital requirements and use of credit risk transfer and risk sharing in multifamily position the company to support credit availability and potentially stabilize earnings through different credit cycles.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Federal National Mortgage Association's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 0.2% today to 0.0% in 3 years time.
• Analysts expect earnings to reach $764.3 thousand (and earnings per share of $0.0) by about May 2029, down from $68.0 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20946.8x on those 2029 earnings, up from 604.3x today. This future PE is greater than the current PE for the US Diversified Financial industry at 18.0x.
• Analysts expect the number of shares outstanding to decline by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.46%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent macro uncertainty and a challenging housing market, which management explicitly calls out, could pressure mortgage origination volumes over time and limit growth in the $4.1 trillion guaranty book. This would weigh on guaranty fee revenue and net interest income.
• Rising stress in the multifamily segment, reflected in higher serious delinquency rates, increased net charge offs and a $174 million provision for credit losses tied to weakened property valuations, could lead to higher long term credit costs and tighter net margins.
• Growth in the retained mortgage portfolio, which added $36 billion in the quarter, and higher long term debt issuance to support that shift, increase exposure to market and interest rate risk. This could reduce portfolio income and compress overall earnings if funding or asset returns move against the company.
• Reduced capital relief from credit risk transfer transactions, combined with higher risk weighted assets and risk density, points to structurally higher regulatory capital requirements that could constrain balance sheet flexibility and slow net worth growth relative to the scale of the guaranty book and earnings.
• Ongoing cost cutting and heavier reliance on automation and AI, which have brought noninterest and administrative expenses down, may face limits over time. If housing or credit conditions worsen faster than expenses can be managed, the benefit from a leaner cost base could fade and pressure net margins and return on required equity.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of $12.08 for Federal National Mortgage Association based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $20.0, and the most bearish reporting a price target of just $8.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be $32.4 billion, earnings will come to $764.3 thousand, and it would be trading on a PE ratio of 20946.8x, assuming you use a discount rate of 12.5%.
• Given the current share price of $7.16, the analyst price target of $12.08 is 40.7% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.