Fannie Mae said it would send a $3 billion dividend payment to the U.S. Treasury in December as revenue declined in its latest quarter, but profit soared due to accounting benefits and fluctuating interest rates.

The mortgage-finance company posted net income of $3.2 billion for the third quarter, up from $1.24 billion a year prior and $2.95 billion in the second quarter. Revenue dropped 4.1% from a year prior to $5.61 billion.

The increased profit was driven primarily by fluctuating interest rates, which hurt the value of derivatives Fannie uses to manage risk. Sister company Freddie Mac on Tuesday posted a third-quarter profit increase for the same reason.

The percentage of Fannie-backed mortgages more than 90 days delinquent continued to fall, declining to 1.24% from 1.32% in the second quarter and 1.59% in the same quarter a year prior.

Fannie reduced its total loss reserves, which is an estimate on how many probable losses the company has on its books, to $23.1 billion from $24.2 billion last quarter and $30 billion last year.

The increased profits come as Fannie's and Freddie's regulator and some lawmakers have expressed concern over their dwindling capital reserves. Under the terms of the companies' bailout agreement with the Treasury, they send profits above their established capital reserve to the government, but these buffers are slated to wind down to zero dollars by 2018.

So far, that drop in reserves hasn't caused Fannie or Freddie to require more bailout money. Fannie reported a net worth of $4.2 billion as of Sept 30.

Still, any blip in the housing market or volatility in the derivatives values could cause Fannie or Freddie to need taxpayer funds.

In all, after the quarter's dividend, the company will have sent $154.4 billion to the Treasury, compared with the $117.1 billion infusion it has received.

Fannie's large increase in profits emphasizes an accounting quirk that impacts both Fannie's and Freddie's quarterly profitability.

Fannie and Freddie have large investment portfolios whose values, like those of all bonds, rise and fall as interest rates change. The companies use derivatives to hedge interest-rate risk, but for accounting purposes, the derivatives and other hedging instruments are valued at a different time than the hedged assets, causing large profits or losses to appear in the short term.

Fannie Mae took $496 million in fair-value losses in the quarter, compared with a loss of $2.59 billion in the prior-year period.

Fannie buys loans from lenders, wraps them into securities and provides guarantees to make investors whole if the loans default.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

November 03, 2016 08:55 ET (12:55 GMT)

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