Business Plan and Strategy for Fannie Mae:
Foreclosure Profit Generation
Tennessee Technological University
BMGT 6950 Strategic Management
October 7, 2012
Facts and Analysis
Fannie Mae is confronted with two obligations – the first to taxpayers and the second to shareholders. “Goal A” is for FNMA to reduce its portfolio by 15% each year until the end of their government obligation (2018). “Goal B” is to pay back the treasury taxpayer capital to once again retain profit. Once profit is realized, public trading will likely increase.
Implementing a rental program on ...view middle of the document...
This transition resulted in Fannie Mae’s status as a government-sponsored entity (GSE). As GSE Fannie Mae started to grow rapidly, Fannie Mae’s total mortgage assets grew at an average of 15 percent (Exhibit XX) from $114,066 million in 1990 to $919,589 million in 2003 (FHFA Report to Congress, 2012). In early 2000, Fannie Mae began purchasing private label Mortgage Backed Securities (MBS), and gradually became significant purchaser of these securities. Fannie Mae’s total MBS nearly doubled in four years from $706 million in 2000 to $1408 million in 2004(FHFA report to Congress, 2012). Consequently when the securities plummeted in value, Fannie Mae suffered significant losses. As GSE, Fannie Mae was not required to keep sufficient capital to cover the losses as other banks. As a part government entity Fannie Mae, was considered “To big to fall” by many investors. Fannie Mae was believed to have an implicit guarantee from the government, which helped the Fannie Mae become large and powerful. It could borrow money at less interest rate than any other financial institution which gave Fannie Mae a competitive advantage and helped gain large market share.
In 2008, Fannie Mae was bailed out by the US government. The net amount of bail out for GSE is currently at around $151 billion dollars.
Identification of the Main Issues
Fannie Mae has reported net income of $2.7 billion and $5.1 billion for the first and second quarters of 2012, respectively. The announcement of the positive earnings in the first quarter of 2012 was the first since the federal government seized control over Fannie Mae in the fall of 2008 (Federal National Mortgage Association, 2012). By reviewing an internal and external environmental analysis of Fannie Mae, a deeper understanding can be concluded on the reasons why they have finally been able to generate positive net income and ways to continue that trend. A SWOT analysis summarizing this analysis can be viewed by referring to Exhibit X.
External Environment Analysis
An unstable and unpredictable economy has been one of the main driving forces behind the lethargic results produced by Fannie Mae over the past several years. With unemployment rates remaining at high levels (see Exhibit X) and the constant reduction in home values, it is easy to understand why Fannie Mae has struggled financially. These uncontrollable factors have left Fannie Mae with bad loans on their books. Another threat that Fannie Mae will have to deal with is their unknown long-term role in the market due to political reform. Even though no structured plan has been put in place, the administration has proposed different options to reshape the housing market, ranging from privatizing the market to allowing the government to insure certain mortgages (Rachelle Younglai, 2012).
Even though reduction in home values has caused Fannie Mae severe pain previously, recent data shows the economy may be turning around. As of July, average home prices...