Fannie Mae and Freddie Mac recorded a combined $1.94 billion in provisions for credit losses during the third quarter, nearly four times the amount reported a year earlier, as higher projected mortgage rates increased expected losses even while both government-sponsored enterprises remained highly profitable.
The combined provision was nearly four times the $513 million recorded a year earlier, with both enterprises citing higher projected mortgage rates as a major factor in their latest credit-loss estimates.
Fannie Mae reported a $1.14 billion provision for credit losses, while Freddie Mac recorded $800 million, according to their third-quarter financial results released Wednesday and Thursday, respectively.
The two companies generated a combined $7.4 billion in net income, even as they increased their estimates of potential future credit losses.
Higher Rates Are Extending Credit Exposure
The largest driver of the increase was not a sudden wave of defaults. Both enterprises pointed to higher projected mortgage rates, which reduce expected refinancing and prepayment activity.
When borrowers stay in their mortgages longer, the GSEs remain exposed to potential credit losses for longer. That extended exposure can increase the amount they must recognize under their expected credit-loss models.
Freddie Mac Chief Financial Officer Jim Whitlinger addressed the connection during the company's third-quarter earnings presentation.
"Higher projected mortgage rates increase the period over which we are exposed to potential credit losses by extending the expected life of the loans due to lower prepayments," Whitlinger said.
Freddie's $800 million provision compared with $175 million a year earlier. Its single-family business accounted for $685 million of the latest provision, driven primarily by higher projected rates and newly acquired mortgages.
Fannie Mae reported a similar pattern. Its single-family business recorded a $694 million provision, with its allowance for credit losses increasing $580 million during the quarter. The company cited higher actual and forecasted interest rates, new acquisitions, and loans that became delinquent.
A provision for credit losses reflects an updated estimate of potential future losses, rather than mortgages that have already defaulted or losses already realized.
The mortgage rate lock-in effect continues to reshape the outstanding loan pool, with more borrowers carrying higher-rate mortgages while many homeowners remain reluctant to refinance or sell.
Newer Loans Show Signs Of Stress
Although projected interest rates were a major factor in the reserve increases, the earnings reports also contained evidence of actual credit deterioration.
Freddie Mac's single-family serious delinquency rate reached 0.61% at the end of September, compared with 0.57% a year earlier.
The company attributed the year-over-year increase primarily to higher serious delinquency rates among mortgages originated from 2022 through 2024.
Those vintages include borrowers who purchased homes during a period of elevated prices and, in the later years, substantially higher mortgage rates.
Freddie also reported $132 million in single-family net charge-offs during the quarter, compared with $80 million a year earlier, an increase of 65%.
Unlike provisions, net charge-offs reflect credit losses recognized after recoveries.
Still, the broader portfolio remains relatively strong. Freddie reported a weighted average current credit score of 755 and a weighted average current loan-to-value ratio of 54% across its single-family book.
Its newly acquired loans also maintained strong credit characteristics, with a weighted average original credit score of 759, up from 756 a year earlier, and an average estimated loan-to-value ratio of 77%, unchanged year over year.
The emerging credit pressure is concentrated in parts of the existing portfolio rather than indicating broad deterioration in newly acquired loan quality.
Fannie Mae also reported increased single-family credit costs and a serious delinquency rate of 0.62%, while noting that lower-income borrowers remain particularly sensitive to affordability pressures.
The findings add another dimension to foreclosure activity involving newer mortgages.
Based on ICE data, loans originated since 2022 accounted for 49% of foreclosure sales in September. Much of the increase was concentrated in FHA lending, making the figures distinct from the conventional mortgage portfolios held by Fannie and Freddie.
Multifamily Credit Conditions Add Pressure
The increase in expected credit losses was not confined to single-family mortgages.
Fannie Mae recorded a $446 million multifamily provision during the third quarter, with its multifamily allowance increasing $326 million.
The company attributed the increase to weakening credit metrics, lower projected property values, and elevated interest rates. Its multifamily serious delinquency rate reached 0.62%.
Freddie Mac reported a $115 million multifamily provision, primarily reflecting deterioration in portfolio credit performance, partially offset by a reserve release tied to changes in its credit-loss estimation process.
Freddie's multifamily delinquency rate increased to 0.58%, compared with 0.51% a year earlier.
In single-family lending, much of the reserve increase reflects longer expected loan lives. In multifamily, both enterprises are identifying deterioration in underlying credit conditions.
What The Numbers Mean
The GSEs are earning substantial profits, but their expected exposure to future losses is increasing. The results also show that actual credit performance is weakening in certain segments, even while overall single-family delinquency rates remain relatively low.
Those developments could become increasingly relevant to lenders' risk management and capital markets decisions, particularly if projected losses continue to rise or newer loan vintages experience further deterioration.
They do not, however, establish that Fannie Mae or Freddie Mac is preparing to tighten underwriting requirements or increase loan-level price adjustments.
Both enterprises have been placing greater emphasis on loan quality and verification. NMP recently reported on Fannie Mae's expanded occupancy checks and Freddie Mac's efforts to identify loan defects.
Those initiatives address different risks than the economic factors driving the latest credit-loss provisions, but they illustrate the range of credit-quality issues facing lenders and the enterprises.
