Mortgage giants Fanny and Freddie smash the hatch

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Mortgage giants Fannie Mae and Freddie Mac say they’re ready to weather the looming economic storm clouds by building their net worth and pouring billions into them against future losses.

Fannie and Freddie continue to be profitable, posting third-quarter earnings of $2.4 billion and $1.3 billion, respectively, but both companies have set aside more cash to cover future losses. I’m here.

Reported by Fannie Mae Third quarter revenue on Tuesday was $7.2 billion, up 2% from a year ago. However, profits declined by 50% over the same period. This was primarily due to his $2.5 billion increase in credit-related costs set aside to cover the potential impact of falling home prices.

A key factor in Fanny and Freddie building up reserves for credit losses during the third quarter is the potential for home prices to fall. This can make it harder to avoid a foreclosure if the homeowner defaults on payments.

Home price declines in July, August and September have been wiped out, according to data aggregator Black Knight $1.3 trillion Homeowners’ Equity — Largest Quarterly Decrease on Record. But only a small percentage of mortgage borrowers (3.6%) have less than 10% of their share in their home, Black Knight said.

Borrowers in Fannie Mae’s mortgage portfolio have built “strong assets in their homes” based on an average loan value ratio of 50% and a FICO credit score of 752, said Fannie Mae Chief Financial Officer Chrissa Harry ( Chryssa Halley said: Financial results announcement.

chryssa harry

But Halley said falling home prices “increase the likelihood of loan default, increase the amount of credit losses on defaulted loans, affect loss estimates, and increase credit loss reserves.” Stated.

Similarly, Freddie Mac executives said Tuesday, Earnings in the third quarter $5.2 billion, down slightly (1%) from a year ago, with earnings down 55%. This was largely due to his $1.8 billion build-up in loan loss reserves.

Chris Roan

“The increase in loan loss reserves is primarily due to the expected increase in home prices in the third quarter, which is projected to rise 6.7% in 2022 and decline 0.2% in 2023. Financial results announcement.

and weather Fannie Mae economists, published last month, said they expected home prices across the country to fall 1.5% next year and home sales to fall 21%.

Mortgage giant increases net worth

Source: Fannie Mae and Freddie Mac regulatory filings

It was Fanny and Freddie placed in government guardianship During the Great Recession of 2008, their financial reports continued to attract the attention of housing industry stakeholders. This is because it is responsible for keeping trillions of dollars flowing into mortgages during difficult times.

While still a long way from the capital needed to go private again, Fanny and Freddie are steadily increasing their net worth, providing a cushion against a recession, executives say.

Michael DeVito

Freddie Mac CEO Michael DeVito said in the earnings call: “The latest Dodd-Frank Act stress test confirms that Freddie Mac currently has sufficient reserves to weather a highly unfavorable economic scenario.”

With three months left in 2022, Fannie Mae’s net worth of $58.8 billion increased 24% as of Sept. 30 from Dec. 31, 2021. Freddie Mac also increased his net worth by nearly 26% to $35.2 in the same period. a billion.

David Benson

“In this economic environment, the industry expects Fannie Mae to be a stable pillar of the market, as well as our leadership in housing affordability and equity,” said Fannie Mae. CEO David Benson said on the company’s earnings call.

Last month, Fanny and Freddy’s federal regulator ordered the company Cut fees for many first-time homebuyers and raise fees for most cash-out refinances early next year.

Benson — who Hand over the reins to CEO Fannie Mae To former JP Morgan Chase Director Priscilla Almodovar on Dec. 5 — the company said: [federal regulators] and the industry’s revision of the pricing framework.

Growth of Fanny and Freddie Single Family Home Loan Portfolio

Source: Fannie Mae and Freddie Mac regulatory filings

Last year, Fanny and Freddy’s combined single-family mortgage portfolio grew 8.4% to $6.6 trillion.

Freddie Mac posted its fastest annual growth rate in the past 12 months, with its single-family mortgage portfolio growing 10.8% to $2.97 trillion. Fannie Mae’s portfolio is $3.62 trillion, growing modestly by 6.5%.

For now, serious delinquencies in Fanny and Freddie’s portfolio are significantly lower than they were a year ago as borrowers who fell behind in payments during the COVID-19 pandemic continue to catch up.

At 0.69% as of Sept. 30, Fannie Mae’s serious family loan delinquency rate (borrowers 90 days or more past due) is less than half what it was at the same time a year ago (1.62%). .

Freddie Mac reported a severe delinquency rate of 0.67%, down from 1.46% a year earlier, largely thanks to a decline in loans under reprieve.

Decline in mortgage financing

Source: Fannie Mae and Freddie Mac regulatory filings

As is the case with the mortgage industry as a whole, rising interest rates have significantly reduced Fanny and Freddy’s new business, especially refinancing.

Fannie Mae’s Q3 funding for mortgage refinancing was $26 billion, down 86% from a year ago. Purchase loan funding decreased 20% to $92 billion over the same period.

Freddie Mac surpassed Fannie Mae for the first time this year, successfully raising $98 billion of purchase loans, up 14% from the second quarter. But compared to a year ago, purchase loan funding is down 26% for him, and refinancing funding is down 86% for him to $23 billion.

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