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Mortgage giants Fannie Mae and Freddie Mac say they’re prepared to weather economic storm clouds brewing on the horizon as they build their net worths and sock away billions for future losses.
While Fannie and Freddie remain profitable — posting third-quarter profits of $2.4 billion and $1.3 billion, respectively — each company set aside even bigger pots of money to cover future losses.
Fannie Mae reported $7.2 billion in third-quarter revenue Tuesday, up 2 percent from a year ago. But profits were down 50 percent over the same period, largely due to a $2.5 billion increase in credit-related expenses — money set aside to cover the potential impact of falling home prices.
The main driver prompting Fannie and Freddie to build up reserves for loan losses during the third quarter is the prospect of falling home prices, which could make it harder for homeowners to avoid foreclosure if they get behind on their payments.
According to data aggregator Black Knight, home price declines in July, August and September wiped out $1.3 trillion in homeowner equity — the largest quarterly decline on record. But only a small proportion (3.6 percent) of mortgage borrowers have less than 10 percent equity in their homes, Black Knight said.
With an average loan-to-value ratio of 50 percent and 752 FICO credit score at origination, borrowers in Fannie Mae’s mortgage portfolio have built up “strong equity in their homes,” said Fannie Mae Chief Financial Officer Chryssa Halley on an earnings call.
Chryssa Halley
But Halley said lower home prices “increase the likelihood that loans will default and increase the amount of credit loss on loans that do default, which impacts our estimate of losses and increases our provision for credit losses.”
In a similar vein, Freddie Mac executives said Tuesday that while third-quarter revenue was down only slightly (1 percent) from a year ago, to $5.2 billion, profits were down 55 percent, primarily due to a $1.8 billion buildup in reserves for credit losses.
Chris Lown
“The increase in our allowance for loan losses was primarily driven by our third quarter house price appreciation forecast, which now forecasts a 6.7 percent increase in 2022 and a 0.2 percent decline in 2023,” Freddie Mac CFO Chris Lown said on the company’s earnings call.
In a forecast issued last month, economists at Fannie Mae said they expect national home prices to decline by 1.5 percent next year and that home sales will fall by 21 percent.
Mortgage giants grow net worth
Source: Fannie Mae and Freddie Mac regulatory filings
Although Fannie and Freddie were placed in government conservatorship in 2008 in the last big downturn, their financial reports are still followed closely by housing industry stakeholders because of the role the companies play in keeping trillions of dollars flowing into mortgage lending when times are tough.
While still far short of the capital they would need to become private companies again, Fannie and Freddie have steadily grown their net worth, giving them some cushion for a downturn, executives at the company say.
Michael DeVito
“While we remain undercapitalized from a regulatory standpoint, our earnings enable us to continue adding to our net worth, which helps improve our capital resilience,” Freddie Mac CEO Michael DeVito said on the earnings call. “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.”
At $58.8 billion with three months left to go in 2022, Fannie Mae’s net worth as of Sept. 30 was up 24 percent from Dec. 31, 2021. Freddie Mac has also grown its net worth by nearly 26 percent over the same period to $35.2 billion.
David Benson
“In this economic environment, the industry is looking to Fannie Mae to be a stable pillar for the market — and also for our leadership on housing affordability and equity,” Fannie Mae CEO David Benson said on the company’s earnings call.
Last month, Fannie and Freddie’s federal regulator ordered the companies to slash fees for many first-time homebuyers and also increase fees for most cash-out refinancings early next year.
Benson — who will hand over the Fannie Mae CEO reins to former JP Morgan Chase Director Priscilla Almodovar on Dec. 5 — said the company “will be working with [federal regulators] and the industry” on revisions to its pricing framework.
Growth in Fannie and Freddie’s single-family mortgage portfolios
Source: Fannie Mae and Freddie Mac regulatory filings
In the last year, Fannie and Freddie have grown their single-family mortgage portfolios by a combined 8.4 percent to $6.6 trillion.
Freddie Mac has posted the strongest annual growth over the last 12 months, growing its single-family mortgage portfolio by 10.8 percent to $2.97 trillion. At $3.62 trillion, Fannie Mae’s portfolio grew by a more modest 6.5 percent.
For now, serious delinquencies in Fannie and Freddie’s portfolios are well down from a year ago as borrowers who got behind on their payments during the COVID-19 pandemic continue to catch up.
At 0.69 percent as of Sept. 30, Fannie Mae’s seriously delinquent rate (borrowers behind on their payments by 90 days or more) on single-family loans is less than half what it was at the same time a year ago (1.62 percent).
Freddie Mac reported a serious delinquency rate of 0.67 percent, down from 1.46 percent a year ago, thanks largely to a decline in loans in forbearance.
Decline in mortgage funding
Source: Fannie Mae and Freddie Mac regulatory filings
As is the case for the mortgage industry as a whole, rising interest rates have drastically reduced Fannie and Freddie’s new business, particularly refinancing.
At $26 billion, Fannie Mae’s third-quarter funding for mortgage refinancings was down 86 percent from a year ago. Purchase loan funding dropped 20 percent over the same period to $92 billion.
Freddie Mac managed to boost purchase loan funding by 14 percent from the second quarter to $98 billion, surpassing Fannie Mae for the first time this year. But compared to a year ago, purchase loan funding was down 26 percent while funding for refinancing dropped 86 percent to $23 billion.
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