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The spring homebuying season was something of a bust for mortgage giants Fannie Mae and Freddie Mac, but both managed to boost their profits and net worth as most borrowers had no trouble making payments on nearly $7 trillion in single-family mortgages backed by the companies.
Fannie and Freddie don’t make loans themselves, but guarantee payments to investors who buy mortgage-backed securities that are the ultimate source of funding for most U.S. home loans. During the second quarter, the mortgage giants guaranteed $172 billion in single-family mortgages, down 44 percent from $310 billion a year ago.
Rising rates curb mortgage giants’ new business
That’s partly due to last year’s dramatic runup in mortgage rates, which put a big dent in mortgage refinancings. But Q2 purchase loan guarantees during the prime homebuying season of April, May and June were also down 24 percent, to $149 billion.
In reporting Q2 earnings, Freddie Mac CEO Michael DeVito called it a “solid quarter,” with Freddie helping 372,000 borrowers buy, refinance, or rent a home — the majority of them affordable to low- or moderate-income borrowers and renters.
Michael DeVito
“The second quarter saw single-family home prices stabilize, influenced by strong demand, higher residential mortgage rates, and limited homes for sale,” DeVito said in a statement. “Renters continue to be cost burdened as rents rose in the face of softening multifamily property prices.”
Fannie Mae said it acquired 227,000 single-family purchase loans during Q2, more than 45 percent of which were taken out by first-time homebuyers, and refinanced approximately 54,000 single-family mortgages.
Profits up as reserves for losses cut
Freddie Mac generated $2.9 billion in Q2 profits, a 20 percent increase from a year ago, thanks in large part to firm home prices and low loan default rates that allowed the company to release $500 million that had been reserved for losses on single-family mortgages.
At 0.56 percent as of June 30, the serious delinquency rate on Freddie Mac’s mortgage portfolio was below pre-pandemic levels, and down from 0.76 percent at the same time a year ago.
Fannie Mae posted $5 billion in Q2 profits, a $1.2 billion leap from Q1 that was also driven by the release of $1.4 billion earmarked for credit losses.
Priscilla Almodovar
“With our solid second quarter performance, Fannie Mae continues to serve as a stabilizing force for America’s housing finance system in even the most challenging markets,” Fannie Mae CEO Priscilla Almodovar said, in a statement. “After nearly 15 years of transformation, today, Fannie Mae is safer and stronger. This is thanks to our team’s dedicated efforts to improve the resiliency of our business and our steadfast focus on risk management.”
With potential claims on their loan portfolios growing, Fannie and Freddie were placed in government conservatorship in September 2008, and “have now been in this state for more than 14 years,” the Federal Housing Finance Agency (FHFA) noted in June, in its annual report to Congress. “When the conservatorships were initiated, it was not expected that they would continue for such a long period of time.”
Combined net worth up 14% this year, to $111 billion
While Congress hasn’t made re-privatizing Fannie and Freddie a priority, the mortgage giants continue to build their net worth, which could eventually give lawmakers more leeway to act.
As of June 30, Fannie and Freddie’s combined net worth was $111 billion, up 14 percent from the beginning of the year.
Former Freddie Mac CEO Donald Layton has estimated that Fannie and Freddie could be considered recapitalized when their combined net worth hits $150 billion. But the actual amount needed would depend on how the mortgage giants might be structured when released from conservancy and how much of a backstop the government would provide.
In its report to congress, the FHFA noted that Fannie and Freddie remain undercapitalized, in large part because the companies’ senior preferred stock is excluded from regulatory capital.
“Congress and FHFA are not the only organizations that must be involved in addressing [Fannie and Freddie’s] conservatorships and the future of the U.S. housing finance system,” the report said. “The U.S. Department of the Treasury, which holds a significant economic interest in the Enterprises, and other Federal agencies will need to resolve a series of outstanding issues as part of the process to end the conservatorships.”
In the meantime, the FHFA pledged to stay focused on “building [Fannie and Freddie’s] capital reserves, improving their safety and soundness, and ensuring that they continue to meet their mission obligations.”
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