Fannie Mae earnings drop, driven by credit-related expense

Fannie Mae’s first-quarter earnings fell as higher rates contributed to lower amortization income, it recorded a charge for credit expenses and it adopted new accounting guidance for certain legacy loans.

The government-sponsored enterprise’s net income was $4.4 billion in the first three months of this year, down from $5.2 billion the previous quarter and $5 billion a year ago. During the period, Fannie recorded $7.48 billion in net revenues, which exceeded Seeking Alpha’s consensus estimate by $2.03 billion and was up from almost $6.83 billion a year ago. However, that amount was down from the $7.65 billion in net revenues recorded the previous quarter.

Net interest income that fell just short of $7.4 billion was the primary contributor to net revenues dropping. In line with net revenues, NII was down from nearly $7.59 billion the previous quarter, but up from a little over $6.74 billion a year earlier.

Fannie Mae executives forecast a challenging year in 2022, given that rates saw their biggest increases since 1994 in the first quarter and global uncertainties are persisting. However, they noted that some of the key drivers of the relative decline in income were more driven by what could be one-time accounting adjustments for existing assets than new business developments.

“The largest contributors to the changes in our results in the first quarter of this year, compared to the fourth quarter of 2021 were credit-related expense investment losses and fair value gains,” Chief Financial Officer Chryssa Halley said during Fannie’s earnings call.

Timing related to when Fannie recognized home price gains, and its need to recategorize of troubled debt restructurings under the new accounting guidance appear to be why it took a credit-related charge during the quarter in contrast to competitor Freddie Mac, which recognized a benefit.

“As our allowance previously took into account expected home price growth in 2022, rather we recorded a credit-related expense driven by a net increase in our allowance for previously modified loans that we account for as troubled debt restructuring or TDR,” Halley said.

Like Freddie, Fannie did record an increase in guarantee fees. The average for g-fees charged on new conventional loan acquisitions during the quarter was 48.9 basis points, compared to 47.1 the previous quarter and 48 a year earlier. This average fee is net of the 10 basis point Temporary Payroll Tax Cut Continuation Act fee that Fannie and Freddie are slated to pay to the Treasury through 2032. 

Also like Freddie Mac, Fannie reported higher net worth in the quarter. At Fannie, this rose to $51.8 billion, compared to $47.4 billion at the end of fourth-quarter 2021, and $30.2 billion a year earlier.

Although the net worth gain is helpful in moving toward capitalization goals under a new framework that went into effect during the first quarter, it falls short of them, Halley noted. The new framework excludes the value of preferred stock and deferred tax assets, which are included in the net worth calculation. That leaves Fannie with a $272 billion shortfall in the amount needed to be fully capitalized under regulatory guidance aimed at protecting the GSE and taxpayers from various market, credit and operational risks, she said.

Reiterating a previous forecast, Fannie executives warned that a recession is possible next year, but emphasized that if it materialized it would likely be a “modest” one unlike the Great Recession due to improvements in credit quality, leverage and servicing since then.

“We expect home sales, home prices and mortgage origination volume to cool, but importantly, we do not expect a housing downturn of the severity or duration that we saw in 2008,” said David Benson, president and interim CEO, during Fannie’s earnings call. Benson succeeds former CEO Hugh Frater, who retired May 1.