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How Fannie and Freddie Weathered 2017

FHFAThe Federal Housing Finance Agency [1] (FHFA) released [2] its Performance and Accountability Report—detailing FHFA's activities as regulator and conservator of the enterprises Fannie Mae and Freddie Mac during fiscal year (FY) 2017.

According to FHFA Director Melvin Watt, in FY 2017, the FHFA made notable progress on its three strategic goals:

1. Ensuring safe and sound regulated entities, totaling $172 million gross costs.

2. Ensuring liquidity, stability, and access to housing finance, totaling $36 million gross costs.

3. Managing the enterprises’ ongoing conservatorships, totaling $57 million gross costs.

For FY 2017, the enterprises’ ownership of single-family seriously delinquent loans, defined as loans that are more than 90 days overdue—is declining.

There are an estimated 265,000 seriously delinquent loans as of September 30, 2017, compared to an approximate 321,000 seriously delinquent loans in FY 2016—representing a decline of 17 percent.

Further, the number of homes the enterprises own through foreclosure declined to roughly 38,000 properties at the end of

Q3 2017, a 30 percent decrease compared with about 54,000 properties at the end of Q3 2016.

The FHFA notes that the financial condition of the enterprises’ could continue to experience volatility in the future as market conditions change.

“These financial instruments, which include derivatives and certain securities, could fluctuate substantially from period to period because of changes in interest rates, the yield curve, mortgage and credit spreads, and implied volatility,” the report noted.

Due to the large size of the GSEs’ portfolios, even small changes in home prices and interest rates can have a great impact on their financial performance.

For 2017, the capital reserves for each enterprise are $600 million—scheduled to decline to zero by January 1, 2018.

The report noted that as the capital reserve amount under the Preferred Stock Purchase Agreement declines to zero, there will be an increase in the prospect of a quarterly loss resulting in a draw against the funding commitment available from the Treasury Department.

Further, the enterprises reported reduced income due the increasing volumes of credit risk. Since 2013, when the enterprises’ single-family Credit Risk Transfer programs begun through March 2017, Fannie Mae and Freddie Mac have transferred a portion of credit risk on $1.6 trillion of Unpaid Principal Balance (UPB), with a combined Risk in Force of about $54.2 billion—representing 3.4 percent of UPB.

Additionally, $779 billion of UPB and $197 billion of RIF has been transferred to primary mortgage insurers from 2013 through Q2 of FY 2017.

As for REO, throughout the year the enterprises have maintained their focus on Neighborhood Stabilization Initiative as a key strategy for responsibly disposing of REO inventory in a manner that supports community stabilization by facilitating the sale of approximately 3,091 REO properties to community stabilization partners in 18 of the hardest hit metropolitan statistical areas.

To view the full report, click here [3].