Government-backed mortgage giant Fannie Mae earned $4.7 billion in profits during the second quarter of 2022, despite the negative impact of rising interest rates on its single-family portfolio and worsening affordability in the multifamily space.
Fannie Mae also increased its quarterly net interest income from $7.4 billion to $7.8 billion, primarily due to a higher income earned from its retained mortgage portfolio.
“Although our mortgage acquisitions continue to slow driven by the steep drop in refinancing volume, we continue to deliver on our liquidity mission for the mortgage market,” President and Interim Chief Executive Officer David Benson said in an earnings call on Friday. “Our solid second quarter results enhance our financial strength, and we remain focused on both managing risk and serving our mission to provide sustainable and affordable financing for the benefit of renters and homeowners.”
From April to June, Fannie Mae financed 574,000 home purchase and single-family refinance loans alongside 156,000 affordable rental units for households making at or below 120 percent of the median area income.
A sharp increase in 10-year treasury notes (+67 basis points) and 30-year fixed rate mortgage rates (+103 basis points), pushed Fannie Mae’s quarterly single-family conventional acquisition volume ($173.2B) and refinance volume ($61.3B) down 28 percent and 54 percent, respectively.
However, robust first-time buyer activity lifted the mortgage giant’s purchase acquisition volume to its highest quarterly level since Q1 2019, with an increase of 6.7 percent to $111 billion.
On the multifamily side, Fannie Mae’s acquisition volume exploded from $2.7 billion in Q1 to $18.7 billion in Q2 as it focused on financing workforce and affordable housing.
“The credit profile of our multifamily book of business remains strong, with a weighted average original loan to value ratio of 65 percent and a weighted average debt service coverage ratio of 2.2 times our multifamily’s DQ rates declined to 34 basis points as of June 30, 2022,” Chief Financial Officer Chryssa Halley said of the guarantor’s multifamily portfolio.
Even as Fannie Mae logged solid results for Q2, both Benson and Halley predicted increasing headwinds for the remaining quarters of the year with Benson forecasting a recession by Q1 2023. However, both leaders said the recession will be nothing like the Great Recession thanks to tighter lending standards.
“As we noted last quarter, we do not expect a downturn that matches the severity of 2008 in terms of its impact on housing, or our financial results, mostly due to better overall credit quality, less leverage in the maturity of our loss mitigation practices,” Benson said.
In Q2, Fannie Mae’s acquisition FICO scores averaged 746 with serious delinquencies in its single-family portfolio declining from 101 basis points at the end of March to 81 basis points at the end of June.
While there won’t be a flood of mortgage delinquencies and foreclosures à la 2007 and 2008, Halley said Fannie Mae has decided to downgrade their forecast for Q3 and Q4 as mortgage rates and inflation crunch consumers’ pockets.
Fannie Mae single-family mortgage market originations are expected to decrease 43 percent annually to $2.5 trillion, with nearly 70 percent of activity expected to come from purchase originations. Meanwhile, continued supply chain and labor constraints are projected to push multifamily market originations down $50 billion to $425 billion.
Lastly, market headwinds are expected to squeeze Fannie Mae’s annual amortization income and net income as higher interest rates reduce refinance demand.
“Although Fannie Mae enters this period of uncertainty from a relative position of strength, we are fully aware that we are in a highly unusual and potentially volatile global and economic environment,” Benson noted. “Therefore, we must expect the unexpected.”
“We will continue to focus on managing our risks and fulfilling our mission to be a reliable source of affordable and sustainable financing,” he added. “And we remain committed to helping renters and homeowners have access to housing solutions that meet their needs.”
Fannie Mae’s sister company, Freddie Mac, reported its results on Thursday with a $2 billion net income. Although Freddie remained profitable, the guarantor struggled more with maintaining its purchase and refinancing volume, both of which experienced double-digit declines in Q2.
“Our work has taken on greater complexity and importance in the current economic environment,” Freddie Mac CEO Michael DeVito said on Thursday. “Higher mortgage rates, continued house price appreciation, and persistent lack of supply are slowing the housing market and challenging affordability for many families.”
If Fannie and Freddie stay profitable and continue to build their net worth and capital reserves, they could be allowed to exit government conservatorship, although there’s no consensus among lawmakers on exactly how to do so.