Fannie Mae, the larger of two government-related loan buyers the Trump administration is considering repositioning for monetization, reported net worth and efficiency improved in the second quarter but earnings fell due to a credit loss revision linked to softer home prices.
The government-sponsored enterprise generated $3.3 billion in net income during the period, down from $3.7 billion in the previous quarter and $4.5 billion in the same fiscal period a year earlier. Net worth rose $101.6 billion from $98.3 billion in the first quarter. Administrative expenses dropped 15%, saving $256 million in non-interest costs. Net revenues were $7.2 billion, up 2% versus first quarter and relatively flat compared to a year earlier.
The stability and earnings power of Fannie Mae and Freddie Mac are central to the mortgage market, where they buy a large share of loans, and also any plan to adjust the conservatorship status they’ve had since the Great Financial Crisis to accommodate monetization. Since that time, Fannie has generated 30 consecutive quarters of profitability.
“We will continue operating the company as a for-profit enterprise so that we can drive down housing costs and deliver maximum value for the American people,” Bill Pulte, director of the agency that serves as the GSEs’ regulator and conservator, said in a press release.
Fannie CEO Priscilla Almodovar attributed a consecutive-quarter drop in the efficiency ratio to Pulte, who heads the agency previously known as the Federal Housing Finance Agency. (Pulte has rebranded it as U.S. Federal Housing.) That ratio fell to 31.6% from 36.1%
“In partnership with Director Pulte and U.S. Federal Housing, our Fannie Mae team is deeply engaged and energized to continue to find ways to make housing more affordable, drive efficiency and prevent fraud,” she said during the earnings call.
“The decrease in expenses is mostly attributable to reductions in employees and contractors as well as a decrease in credit enhancement expenses this quarter,” Chief Financial Officer Chryssa Halley added later during the call.
Details related to mortgage acquisitions
Halley said Fannie’s purchases of home loans from private lenders were largely healthy during the quarter but it is monitoring a couple trends in loan indicators.
“The single family guarantee book is relatively flat compared to comparable quarters, while second quarter loan acquisitions of $84 billion improved from first quarter levels due to seasonal trends and a slight uptick in refinance activity,” she said.
The trends Fannie is monitoring are a mild climb in the number of loans with relatively higher debt-to-income ratios and a shift toward lower credit scores.
“In the second quarter, we saw acquisitions trend slightly higher on a debt to income greater than 43% and FICO score less than 680,” she said.
Halley said Fannie also is keeping an eye on loan performance and has maintained use of credit risk transfers as a mitigation strategy, something their previous regulator during President Trump’s first term backed away from, but their current one so far appears to support.
The enterprise saw a pickup in short-term delinquencies that appeared to be in line with typical shifts after a seasonal improvement related to tax refunds normalizes, but is less concerned about that than it is a 9 basis-point climb in serious delinquencies.
“We are monitoring this trend and recognize the various financial pressures U.S. households nationwide face in this environment, in addition to more localized impacts of natural disasters of note in our single family portfolio,” she said.
In fulfilling its public mission, Fannie took several steps to address affordability concerns, according to Almodovar.
“We provided $102 billion of liquidity to the mortgage market. This helped 381,000 households including 183,000 homebuyers, 52% of whom were first time homebuyers. We also helped to keep over 25,000 households in their home by offering various forms of assistance,” she said.
Capital and a basis for peer comparison
Fannie built $3.7 billion in regulatory capital during the quarter, a priority in efforts to potentially make the enterprise more attractive to investors.
In the context of any monetization that might be done through a stock offering, capital is key.
“With a capital shortfall – particularly at Freddie Mac – any public offering may require sizable equity raises,” Noah’s Arc Capital Management said in a recent report on citibiz.co downgrading Fannie’s stock to a hold. The downgrade reflects concern about a partial release limiting upside.
Almodovar suggested Fannie could be sized up as a company relative to others in its league based on a metric used in the banking system.
“We calculate the restrictive return on required common equity, Tier One, as a way to measure and compare our performance to peers, and in the second quarter, our return on equity was 9.5%,” Almodovar said.
Fannie’s stock was up around 3% shortly after its earnings call and trading at $8.80 per share.
