Fannie Mae Reports Smaller Loss in Q2. Still Needs Additional Funding

by devteam August 10th, 2010 | Share

Fannie Mae has released their Q2 earnings report.  The government sponsored enterprise (GSE)rnannounced a shortfall of $1.2 billion, in the second quarter. a vast improvement over the $11.5 billion lost inrnthe first quarter of the year and $20.4 billion in the second quarter of 2009.  The Q2 losses amount to .55 perrnshare compared to $2.29 per share in the previous period and $2.67 per share arnyear earlier.</p

Based on the figures, the Acting Director of the FederalrnHousing Finance Agency, conservator of Fannie Mae, requested an additional $1.5rnbillion from the U.S. Treasury under the terms of the preferred stock purchase agreementrnbetween the two entities.  The funds werernrequested to eliminate the company's net worth deficit as of June 30.  Last quarter FHFA received $8.4 billion torncure the net worth deficit that existed at the end of March.  This quarter's contribution by Treasury willrnbring the total investment by taxpayers in Fannie Mae to $86.1 billion.</p

Fannie reports that those loans in its portfolio written inrn2009 and 2010 continue to perform solidly and its credit-related expenses overallrndecreased by more than $7 billion.  Thesernrecent vintages, the company says, have the lowest early serious delinquencyrnrates of any loans the company has acquired in the last 10 years due to therntightened underwriting standards that the company began to introduce in 2008rnand its sharply reduced acquisition of higher risk loans.  </p

Almost all of the company's realized credit losses in the pastrntwo years have been attributable to single-family loans it acquired from 2005rnto 2008; a group of loans that continues to be problematic.  Fannie recognizes it probably has not yetrnrealized all of the credit losses from these loans, but states it is sure itrnhas provided sufficient reserves for most future losses. </p

The company had $4.5 billion in net revenues for the quarterrncompared to 3.0 billion in Q1, a 49 percent increase.  This was due primarily to an increase in netrninterest income which grew from 2.8 billion in the first quarter to 4.2rnbillion.  The increase was due almostrnentirely to the purchase during the quarter of the majority of loans that werernfour or more months delinquent from single-family mortgage backed security (MBS)rntrusts.  The cost of holding these loansrnin Fannie's own portfolio is less than advancing delinquent payments to holdersrnof the MBS securities.  The companyrnpurchased approximately 858,000 loans with an unpaid principal balance of $170rnbillion from single-family MBS trusts during the first half of the year; 570,000rnof these loans with a value of $114 billion were purchased in the secondrnquarter.  Interest income that therncompany did not recognize for nonaccrual mortgage loans was $2.2 billion,rncompared with $2.7 billion in the first quarter of 2010.</p

Credit related expenses, which are the total provision forrncredit losses plus foreclosed property expense, dropped from $11.9 billion inrnthe first quarter to $3.9 billion reflecting a decrease in the rate ofrnseriously delinquent loans to 4.99 percent from 5.47 percent, and a decrease inrnaverage loss severities.  The companyrnalso noted that this was also partially due to an update to the company'srnloan-loss allowance model to use mark-to-market loans-to-value (LTV) ratiosrnrather than LTV ratios at origination in its severity calculations.  This resulted in a change in estimate and arndecrease in loan loss allowances of about $1.6 billion.  These factors were partially offset by anrnout-of-period adjustment of $1.1 billion related to an additional provision forrnlosses on pre-foreclosure property taxes and insurance receivables.  </p

Credit losses,rnincluding net charge-offs plus foreclosed property expenses increased to $7.0rnbillion to $5.1 billion due to increased defaults and number of properties inrnthe owned-property inventory. </p

Fannie Mae acquired 68,838 single-family properties as ownedrnreal estate during the quarter, up from 61,929 in the first quarter.  At the end of the quarter it had a total ofrn129,310 properties in its inventory compared to 109,989 on March 31.  Along with the increase in numbers ofrnproperties came an increase in the numbers that were unmarketable; 36 percentrnbecause they are still within the statutory redemption period, others becausernthey were still occupied, or being repaired. rnDespite its workout initiatives, the company expects foreclosures torncontinue to increase through the remainder of the year because of a continuingrnweak economy.</p

The company's Single-Family Credit Guarantee book ofrnbusiness was $2.87 trillion compared with $2.88 trillion during the firstrnquarter; fee income in each of the two quarters was $1.8 billion.  This portion of the business lost $5.1rnbillion in the second quarter due to credit-related losses, a substantialrnimprovement over the $12.6 billion lost in the first quarter. </p

The Housing and Community Development multifamily guarantyrnbook of business was unchanged from the first quarter at $186.1 billion fromrnwhich the company earned $119 million in the second quarter compared to $99rnmillion in Quarter One.  </p

Capital Market earnings were $4.4 billion compared to $3.1rnbillion; the net mortgage investment portfolio balance was $817.8 billionrncompared to $764.8 billion.  Capital Marketrnearnings for Quarter Two were $4.4 billion compared to $2.1 billion in thernearlier period. </p

Based on preliminary numbers, Fannie Mae estimates that homernprices improved nationally by 2.2 percent in the second quarter but expectsrnfurther declines the rest of this year and into 2011 before pricesrnstabilize.  Home values have declinedrn16.9 percent since the peak was reached in the third quarter of 2006.</p

Other quarterly performance data contained in the report (Q1rndata in parens where provided):</p<ul class="unIndentedList"<liPurchased or guaranteed $424 billion in loansrnincluding the $170 billion in delinquent loans purchased from MBS trusts.</li<liProvided $1.2 trillion in liquidity includingrnpurchasing 205 billion in delinquent loans from the MBS Trusts; financingrn4,151,000 conventional single family mortgages and 487,000 multi-familyrnmortgages.</li<liIssued 39.1 percent of all single family MBSrn(40.7 percent.)</li<liCompleted home retention workouts for overrn132,000 loans with principal balance of $27.0 billion (26 percent increase overrnnumber of workouts in Q.1)</li

  • Loanrnmodifications including permanent HAMP modifications, 121,696 (93,756).</li
  • Repaymentrnplans/forbearances, 8716 (8,682)</li
  • Pre-foreclosure sales and deeds-in-lieu of foreclosure, 21,515 (17,326.)</li
  • Guaranteed 354,000 refinances.</li

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  • About the Author


    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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