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Fannie, Freddie Earnings Take Hits In Q3

David Krechevsky
Nov 08, 2022
Quarterly Earnings

Fannie YOY earnings down nearly 50%; Freddie's fall 55% as housing market shrinks.

The government-sponsored enterprises Fannie Mae and Freddie Mac both felt the sting of the shrinking housing market, with each reporting significantly reduced earnings in the third quarter.

The Federal National Mortgage Association, or Fannie Mae, reported net income of $2.4 billion in the quarter ended Sept. 30, down about 48% from the second quarter and down nearly 50% from the third quarter of 2021. The GSE said the results were driven primarily by an increase in credit-related expenses and a decrease in net interest income.

The Federal Home Loan Mortgage Corp., or Freddie Mac, reported net income of $1.3 billion for the third quarter, down 46.5% from the second quarter and a 55% drop year-over-year. It attributed the decline primarily to building a credit reserve in its Single-Family unit.

Both organizations were feeling the combined effects of inflation, rising interest rates and home prices, and tight supply in the housing market, which has significantly reduced housing affordability.

Fannie Mae

Fannie Mae President David C. Benson, who has served as interim CEO and will relinquish the title when newly appointed CEO Priscilla Almodovar takes over on Dec. 5, noted that the 30-year, fixed-rate mortgage rate increased 100 basis points during the quarter, and by the end of October was at 7.08%. 

Fannie Mae estimated that home prices nationally rose nearly 14% year over year in the third quarter. While a slower pace than the revised 19% year-over-year increase in the second quarter, the results still adversely affected home sales.

“For borrowers, these price increases and rising interest rates mean that homes are significantly less affordable than they were a year ago,” Benson said during a conference call with analysts and the media. “By our measure, affordability is worse than it was during the 2005-2007 period.”

He added that Fannie Mae’s third-quarter results reflected those changing conditions in the housing market, “and in this environment, we continue to focus on being a stable pillar for the market, managing risk, and supporting renters and homeowners.” 

Some highlights of Fannie Mae’s third-quarter report include: 

  • Acquired approximately 285,000 home purchase loans and 99,000 single-family refinance loans during the third quarter of 2022
  • Single-family conventional acquisition volume was $117.7 billion in the third quarter, down 32% from $172.3 billion in the second quarter. Purchase acquisition volume decreased from $111 billion in the second quarter of 2022 to $92.2 billion in the third quarter, of which over 45% was for first-time homebuyers. 
  • Refinance acquisition volume was $25.5 billion in the third quarter, down from $61.3 billion in the second quarter due to the higher mortgage interest-rate environment.
  • The single-family serious delinquency rate decreased to 0.69% as of Sept. 30 from 0.81% as of June 30, driven by borrowers exiting forbearance through a loan workout or by otherwise reinstating their loan. (Single-family seriously delinquent loans are loans that are 90 days or more past due or in the foreclosure process.)
  • New multifamily business volume was $15.9 billion during the third quarter, compared with $18.7 billion during the second quarter.
  • As of Sept. 30, more than 95% of the loans in the company’s active multifamily guaranty book of business that had received a forbearance, measured by unpaid principal balance, were in a repayment plan or reinstated.

Benson added that, as of Sept. 30, Fannie Mae was $258 billion short of being fully capitalized, though that was a $4 billion improvement from June 30. 

“This improvement was primarily the result of an increase in our retained earnings and lower capital requirements,” he said. “Lower capital requirements were due to single-family [credit risk transfer] issuances, as well as home-price changes that occurred in the second quarter, as our capital calculations incorporate home-price changes on a one-quarter lagged basis.”

He added that “the calculation of available capital under the enterprise regulatory capital framework excludes the stated value of our senior preferred stock and deferred tax assets, both of which are included in the calculation of our net worth.”

Freddie Mac

Freddie Mac CEO Michael J. DeVito also cited the difficult housing market environment for his organization’s third-quarter results.

“As I noted, the current environment is rapidly changing, largely driven by inflation and the Federal Reserve’s reaction to it,” he said during an earnings conference call. “Mortgage rates have risen quickly, and Freddie Mac’s latest Primary Mortgage Market Survey shows the average mortgage rate is more than double from just a year ago.”

“Taken together,” DeVito said, “rising rates, inflationary pressures, and continued supply issues have made accessing and sustaining homeownership harder and more expensive for more families.”

Highlights of Freddie Mac’s report:

  • Net revenues of $5.2 billion, a decrease of 1% year-over-year, as higher net interest income in Single-Family was offset by a decline in non-interest income in Multifamily.
  • Provision for credit losses totaled $1.8 billion, primarily driven by deterioration in housing market conditions, including lower observed and forecasted house price appreciation.
  • New business activity of $121 billion, down 60% year-over-year, as refinance activity slowed significantly due to rising mortgage interest rates.
  • Mortgage portfolio of $3 trillion, up 11% year-over-year, driven by an increase in average portfolio loan size and a higher share of single-family mortgage debt outstanding.
  • Serious delinquency rate of 0.67%, down from 1.46% at Sept. 30, 2021, driven by the decline of loans in forbearance.
  • Completed approximately 28,000 loan workouts. 
  • 61% of mortgage portfolio covered by credit enhancements
  • Mortgage portfolio of $416 billion, up 3% year-over-year, as new business activities were partially offset by borrower prepayments.

As for its financial situation, DeVito said that while Fannie Mae remains “undercapitalized from a regulatory standpoint, our earnings enable us to continue adding to our net worth, which helps improve our capital resilience.” The enterprise reported its net worth for the quarter at $32.5 billion, a 39% increase from the previous quarter.

DeVito noted that the most recent Dodd-Frank Act Stress Test “confirmed that Freddie Mac has sufficient retained earnings today to weather a hypothetical severely adverse economic scenario” and that its credit risk transfer (CRT) program “also contributes to this resilience. Since its inception, we have transferred risk on more than $3.2 trillion of mortgages to private investors through the program.”

He added that investors continue to be willing “to invest in U.S. housing through Freddie Mac CRT, and we continue to demonstrate focus on effectively managing default risk.”

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