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Bank of America Corp (BAC), Citigroup Inc (C): Encouraging Signs For America’s $3 Trillion Problem

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The StressTest column appears every Thursday on Fool.com. Check back weekly and follow @TMFStressTest on Twitter.

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 Skies | Create 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.

Bank of America Corp (NYSE:BAC)

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 Corp (NYSE:BAC) has a $2.2 trillion balance sheet, while Citigroup Inc (NYSE:C) 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.”

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