GSEs Post Positive Net Income for the First Quarter

Freddie Mac, Fannie Mae, and the Federal Home Loan Banks (FHLBanks) experienced a substantial increase in their net income for the first quarter. The Federal Housing Finance Agency (FHFA) released the Quarterly Performance Report of the Housing GSEs today analyzing the first quarter earnings and other contributing factors that boosted these GSEs’ incomes.

The combined first quarter earnings of Freddie Mac and Fannie Mae was $2.4 billion in the first quarter this year, compared to $1.5 billion in the fourth quarter of last year, the FHFA reported. A drop in long-term interest rates drove derivatives down by $4.2 billion for both GSEs during the first quarter.

“Earnings during the quarter also benefited from rising house prices, combined with the continued decline in the number of delinquent loans guaranteed by the Enterprises,” the FHFA said in the report. “In the first quarter of 2015, national house prices rose 1.3 percent, according to the FHFA House Price Index (purchase-only, seasonally adjusted index). Moreover, national house prices rose 5 percent compared to the first quarter of 2014.”

The report also noted that loan loss reserves decreased $8.4 billion during the quarter. This was mostly due to an increase in charge-offs when both Enterprises adopted new regulatory guidance issued by FHFA earlier this year that changed the guidelines for when a loan is determined to be uncollectible. Mortgage-backed securities issued by the Enterprises made up 70 percent of total issuances.

Credit quality of new single-family business was also high during the first quarter, the FHFA said. The average credit score for new single family business volume was 748 for Fannie Mae and 751 for Freddie Mac, and increase from 744 for both Enterprises last quarter.

“The increase in the average credit scores at the Enterprises was driven by the rise in refinance activity and decrease in home purchases, which are generally linked to lower credit scores than refinances. Purchases of nontraditional and higher-risk mortgages continued to be very low,” the FHFA said.

The average loan-to-value (LTV) ratio for new business decreased at both Enterprises as refinances surpassed purchase mortgage originations, which generally have higher LTV ratios. The report said that borrowers were more inclined to use the Enterprises’ refinance programs that focus mainly on deeply underwater borrowers, including the Home Affordable Refinance Program (HARP).

The FHFA report also revealed that refinances accounted for 63 percent of Fannie Mae’s single-family new business volume and 64 percent of Freddie Mac’s volume. Real estate owned (REO) inventory dropped by 10 percent to about 102,000 properties for the first quarter from 113,000 properties at the end of the fourth quarter.

”This is the result of the decrease in the number of seriously delinquent loans, loss mitigation activities, and the length of time required to foreclose on a property,” the FHFA noted. “Since March 31, 2014, the Enterprises’ REO inventory declined by 30 percent or approximately 44,000 properties.”

All FHLBanks reported positive net income for the 14th consecutive quarter, the FHFA reported. The FHLBanks nearly doubled their income for this quarter from $553 million in the fourth quarter last year to $1 billion. Without a $459 million private-label MBS litigation settlement received by the FHLBank of San Francisco, the first quarter income would only have been $57 million higher quarter-over-quarter.