While Fannie Mae and Freddie Mac each reported a net worth of more than $2 billion as of the end of 2014, some uncertainty remains as to their financial sustainability according to FHFA's 2014 Report to Congress released this week.
Fannie Mae reported positive net worth of $3.7 billion as of the end of 2014, slightly more than half of which ($1.9 billion) represented a dividend obligation to the Department of Treasury that was paid on March 31, 2015. Fannie Mae's net income for 2014 of $14.2 billion was only a fraction of the $84 billion the GSE reported for 2013, according to FHFA.
"Overall, uncertainty remains over the sustainability of earnings given the sensitivity of Fannie Mae’s earnings to macro-economic events and changing conditions in the housing market," the report said. "Although Fannie Mae forecasts it will remain profitable, earnings in future years are expected to decline. This is primarily due to the expectation of lower income from resolution agreements and credit-related income, and continued declines in net interest income given the requirement to reduce the level of mortgage assets held on the balance sheet."
Despite strengthening credit risk management in 2014, Fannie Mae maintained an elevated level of risk due to the number of delinquent loans, foreclosed properties, nonaccrual loans, and restructured loans that remain above historical norms and are projected to remain that way for many years, according to FHFA. Fannie Mae continues to hold a large portfolio of REO properties but is unable to market or sell many of those properties due to restrictions placed on them by local and state laws. About 330,000 Fannie Mae-backed mortgages were seriously delinquent as of the end of 2014, and approximately 34 percent of those were delinquent by 25 or more months, according to FHFA. Mortgages originated between 2005 and 2008 in the years leading up to the housing bust accounted for about 59 percent of those seriously delinquent loans. About 22 percent of the seriously delinquent loans at the end of 2014 had LTV ratios above 100 percent.
"Resolving and minimizing the financial impact of these problem assets will be an ongoing challenge for the Enterprise," FHFA said in the report.
Freddie Mac reported positive net worth of $2.7 billion as of the end of 2014, about $0.9 billion of which represented a dividend obligation to Treasury paid on March 31, 2015. Like fellow GSE Fannie Mae, Freddie Mac's 2014 net income of $7.7 billion was well below its 2013 reported net income of $48.7 billion.
Structured debt issuances and insurance transactions resulted in the reduction of single-family credit risk for Freddie Mac in 2014. The Enterprise transferred $126 billion in unpaid principal balance for single-family mortgages through these transactions, which included $105 billion in UPB through STACR (Structured Agency Credit Risk) issuances. Three ACIS (Agency Credit Insurance Structure) transactions accounted for the remaining $21 billion.
Freddie Mac, like Fannie Mae, has a single-family mortgage portfolio that contains high levels of seriously delinquent mortgage loans and distressed private-label securities, which are major sources of credit risk for the Enterprise. Other sources of credit risk include residual risk from modifications and relief finance activities as well as ongoing concerns over counterparty credit risk, according to FHFA.
"Asset quality remains a supervisory concern despite a year-over-year improvement in single-family credit metrics," the report said.
Despite maintaining profitability over 2013 and 2014, like Fannie Mae, a degree of uncertainty exists around Freddie Mac's ability to remain financially stable.
"Freddie Mac’s future earnings prospects are subject to several economic and company-specific risk drivers that could significantly affect profitability," FHFA said in the report. "These risks include a large real estate owned portfolio, a backlog of seriously delinquent single-family loans, uncertain house price appreciation, interest rate movements, and a continued decline in mortgage-related investments. Additionally, it is unlikely that future settlements will significantly contribute to earnings."
Click here to read the entire report.