By one measure, the mortgage giants have built up two-thirds of the reserves needed for them to be released from government conservatorship.

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The abrupt rise in interest rates that curbed mortgage lending in 2022 slowed growth in Fannie Mae and Freddie Mac’s massive loan portfolios, but the mortgage giants remained profitable last year and continue to build their net worths.

By one measure, the government-sponsored enterprises now have about two-thirds of the reserves needed for them to be released from government conservatorship, should policymakers ever agree on how to do that.

For now, executives at Fannie and Freddie are highlighting how they’re putting their resources to work to further the Biden administration’s goals of helping more low-income Americans become homebuyers and addressing racial homeownership gaps.

Profits shrink, but Fannie and Freddie stay in the black

Source: Inman analysis of Fannie Mae and Freddie Mac regulatory filings

In releasing fourth quarter and full year 2022 results, Fannie Mae said fourth-quarter net income was down 73 percent from a year ago to $1.42 billion as revenue declined by 6 percent to $7.1 billion.

With home sales slowing and home prices in many markets on the decline, Fannie and Freddie are socking billions of dollars away to cover anticipated losses, which cuts into profits.

“We recorded a $6.3 billion provision for credit losses in 2022, compared to the $5.1 billion of benefit for credit losses we recorded in 2021,” Fannie Mae Chief Financial Officer Chryssa Halley said on the company’s Feb. 14 earnings call. “The single-family provision was primarily driven by decreases in forecasted home prices.”

While Fannie Mae had its least profitable quarter of the year, smaller sibling Freddie Mac saw fourth-quarter net income rebound to $1.8 billion, up $500 million from a 2022 low of $1.3 billion. That still represents a 36 percent drop in profits from a year ago, with revenue falling 13 percent to $4.8 billion.

Mortgage giants’ new business dwindles

Source: Inman analysis of Fannie Mae and Freddie Mac regulatory filings

Collectively, Fannie and Freddie added just $160 billion in new single-family mortgage business in the final three months of the year, down 71 percent from a year ago as rising mortgage rates all but put an end to the refinancing boom.

Priscilla Almodovar

“While we saw significantly lower single-family business volumes for both purchase and refinance mortgages, we still provided $684 billion in liquidity to the single-family and multifamily markets last year,” incoming Fannie Mae CEO Priscilla Almodovar said on her first earnings call. “This meant help for approximately 2.6 million households who bought, refinanced, or rented a home.”

Mortgage portfolio growth stalls

Source: Inman analysis of Fannie Mae and Freddie Mac regulatory filings

As of Dec. 31, Fannie and Freddie were guaranteeing payments on $6.62 trillion in single-family mortgages.

While the mortgage giants managed to eke out 6 percent annual growth in their portfolios that was largely due to rising home prices. Portfolio growth nearly ground to a halt in the final three months of the year, and new business is expected to shrink even more this year.

“We currently expect the economy to enter a modest recession in the first half of the year, resulting in an increase in unemployment by year-end,” Almodovar said. “This could increase mortgage delinquencies. In addition, mortgage rates might decline modestly, but we believe they will remain well above the lows seen in 2020 and 2021.”

Halley noted that Fannie Mae economists are forecasting that single-family mortgage originations will decline 29 percent this year to $1.7 trillion, with approximately 78 percent of that activity expected to come from purchase originations.

“In fact, approximately 75 percent of our single-family book as of the end of last year had an interest rate below 4 percent, over 200 basis points lower than the current average interest rate for a 30-year fixed-rate mortgage,” Halley said. “Accordingly, even if interest rates decline meaningfully from current levels, most of the loans in our single-family book will not be incentivized to refinance.

Mortgage giants’ combined net worth nears $100 billion

Source: Inman analysis of Fannie Mae and Freddie Mac regulatory filings

While the need to set aside money for future losses is eating away at profits, Fannie and Freddie continue to build their net worths.

As of Dec. 31, Fannie Mae’s net worth — the amount by which the company’s total assets exceed its liabilities — was $60.3 billion, up 27 percent from a year ago. Freddie Mac’s net worth was up 32 percent from a year ago to $37 billion.

At $97 billion, the mortgage giants’ combined net worth is nearly two-thirds of the $150 million in capital that former Freddie Mac CEO Donald Layton has estimated is needed to release the companies from government conservatorship.

Since being placed into government conservatorship in 2008 as potential losses from the subprime mortgage meltdown threatened to put them out of business, Fannie and Freddie have repaid a $191 billion taxpayer bailout plus interest. Since late 2019, the mortgage giants have been permitted to keep the profits they generate in the hopes that they’d be able to stand on their own feet again.

While the Trump administration made a push for privatization — the Congressional Budget Office in 2020 analyzed several scenarios for recapitalizing Fannie and Freddie and returning them to private ownership as soon as 2023 — Democrats haven’t been in such a rush.

The National Association of Realtors and other real estate industry groups want the government to continue playing a role in mortgage markets. NAR, for example, has proposed replacing Fannie and Freddie with a new private entity that’s regulated like a public utility.

In a two-part blog post published by the NYU Furman Center for Real Estate and Urban Policy last year, Layton said the “utility model” is so far “the only solution supported broadly and deemed truly workable­ – and with a low implementation risk to the economy and housing markets.”

Based on his own research into government-mandated annual stress test results, Layton thinks Fannie and Freddie could be considered recapitalized when their net worth hits $150 billion — “and the requirement could potentially be even modestly lower.”

Fannie and Freddie’s affordable and equitable housing missions

So far, Layton writes, the Biden administration has shown little interest in reforming Fannie Mae and Freddie Mac or shepherding them out of conservatorship.

Instead, “the very visible focus of the administration is to implement programs to make housing more affordable and eliminate racial disparities.”

In pursuit of those admirable goals, Fannie and Freddie’s federal regulator, the Federal Housing Finance Agency (FHFA), has mandated that at least 35 percent of the purchase mortgages backed by Fannie and Freddie be provided to low- and very-low income borrowers, while at least 10 percent of purchase mortgages should be targeted to homebuyers in minority census tracts.

But those goals could prove challenging to meet as rising home prices mean Fannie and Freddie have the green light to back bigger and bigger loans. Fannie and Freddie’s baseline conforming loan limit is now $726,200 in most parts of the country, and the mortgage giants can guarantee loans exceeding $1 million in more than 100 higher-cost counties and Census areas.

In October, the FHFA ordered Fannie and Freddie to eliminate upfront fees on many purchase loans to help first-time homebuyers of limited means while raising fees for some other homebuyers and most cash-out refinancings. The fee increases did not sit well with the National Association of Realtors, which complained that they’ll hurt some middle-class homebuyers with good credit scores seeking to buy houses with moderate down payments, as well as borrowers with higher debt-to-income scores.

In another move aimed at helping less affluent borrowers become homeowners, Fannie and Freddie last year updated their guidelines to allow lenders to obtain attorney opinion letters instead of title insurance policies. That development was welcomed by lenders like United Wholesale Mortgage but decried as risky by a trade group for title insurers, the American Land Title Association.

In its 2022 annual report to investors, Fannie Mae said it has submitted a three-year strategic plan to the FHFA with “foundational objectives” that include improving access to equitable and sustainable housing and enhancing the company’s financial and risk positions.

To achieve the first objective, Fannie Mae said its priorities through 2025 will include:

  • Advancing greater equity in the housing finance system by removing significant barriers to quality affordable housing, particularly for historically underserved consumers.
  • Increasing access to sustainable housing by maintaining inclusive credit standards, helping consumers navigate hardships and supporting the housing ecosystem’s adaptation to climate change.
  • Increasing efficiency for the benefit of borrowers and renters through lender, fintech and other stakeholder engagements.

Almodovar, who before taking the CEO reins at Fannie Mae in December headed up Enterprise Community Partners Inc., a nonprofit focused on building affordable rental housing, said the company supported financing for 543,000 first-time homebuyers in 2022, representing more than 45 percent of the single-family home purchase loans Fannie Mae acquired.

On a Feb. 22 earnings call, Freddie Mac CEO Michael DeVito outlined similar goals and pointed to a company-wide initiative to help renters build credit to achieve homeownership and a new process simplifying underwriting by automating review of a borrower’s bank account data to verify assets, income and employment.

Michael DeVito

“In a year with significant volatility, and a challenging macroeconomic environment, Freddie Mac made home possible for 2.5 million families, delivering solid financial results,” DeVito said. “Looking ahead, we expect to place even more emphasis on our mission by further advancing affordable, sustainable and equitable housing plans without compromising safety and soundness. We expect to accomplish these objectives by leveraging our talented workforce, collaborating with market participants to find new solutions and continuously working to effectively manage risks. These actions will enable Freddie Mac to continue to build financial strength and stability essential to fulfilling our mission.”

Status quo through 2030?

In part two of his Furman Center blog post, Layton notes that even if Fannie and Freddie were released from conservatorship under a utility model, the government would still wield considerable influence over them with the Treasury Department controlling 80 percent of voting shares.

While the Treasury Department would presumably seek to divest itself of those shares over time, it might not cease to be the controlling shareholder until at least 2030.

And that’s assuming that lawmakers even want to end control of Fannie and Freddie. Many politicians and interest groups “seem to like today’s status quo,” Layton notes, while the mortgage industry generally favors Fannie and Freddie’s status as stockholder-owned companies, which tend to “pursue innovation and competitiveness far more aggressively than a typical government agency.”

“So, in fact, [Fannie and Freddie] being under government control via FHFA conservatorship might go on as a permanent feature of our housing finance system, even well past 2030, with no return to private ownership being desired or implemented,” Layton concludes. “It is a possibility that cannot be dismissed.”

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Email Matt Carter

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