Fannie Mae earnings sink as loan loss provisions grow

The softening housing market drove Fannie Mae's earnings down further in 2022's fourth quarter as it set aside more funds to protect itself from a forecasted deterioration in loan performance.

The government-sponsored enterprise earned $1.4 billion in net income, down from $2.4 billion the previous quarter and $5.2 billion a year earlier.  For the full-year, net income was roughly $12.9 billion, compared to $22.1 billion in 2021. Comprehensive income was similar.

Fannie took a $6.3 billion provision for credit losses in 2022, compared to $5.1 billion benefit  a year earlier. It also has experienced a relative decline in single-family amortization income with rates higher in the past year and fewer prepayments occurring.

"Our expectation of further home price declines in 2023 and 2024 contributed to our provision for credit losses in the full year and in the fourth quarter," new Fannie Mae CEO Priscilla Almodovar said in the GSE's earnings call.

Single-family net income for 2022 was $10.8 billion, down from roughly $19.1 billion a year earlier, as a reduction in refinancing drove single-family acquisitions down to $85 billion from $118 billion. 

While business and mortgage performance have been bearing up to date, executives warned that the forecasts for lower home prices and a weaker economy make an uptick in loan losses increasingly likely.

"Although our serious delinquency or SDQ rates on both our single-family and multifamily books remains low as of year-end, our allowance reflects our current expectations of future loan losses," said Chryssa Halley, executive vice president and chief financial officer.

Fannie's serious delinquency rate for single-family loans slid slightly for the quarter overall to 65 basis points despite a slight rise on a monthly basis in December that was the first seen since August 2020. The previous quarter's SDR was 69 basis points, 4Q21's was 125.

The multifamily serious delinquency rate was 24 basis points, compared to 42 a year earlier and 26 the previous quarter. 

Multifamily net income was $2.2 billion, down 29% from 2021. Acquisition volume in this segment was roughly flat and under annual maximum caps, with a loan-loss provision linked to the poor performance of senior housing affected by rate hikes and the pandemic.

Overall, net revenues at Fannie Mae were stable at $29.7 billion for the year compared to $29.9 billion in 2021, but they could be challenged in the future.

"We currently expect the economy to enter a modest recession in the first half of the year, resulting in an increase in unemployment by year end," Almodovar said.

The net worth Fannie has been building as a financial cushion against potential business declines grew in the past year to $60.3 billion from $47.4 billion in 2021.

In the past year the GSE fulfilled its dual goals of supporting affordable housing and protecting its finances so that it can keep furthering that aim, executives said. They noted that rising costs in the market presented challenges to those efforts.

"Based on our estimates and assumptions, mortgage payments for would-be homebuyers were nearly 50% higher at the end of 2022 than they were at the end of 2021," said Almodovar.

Fannie has sought to address affordability recently with its adjustments to the single-family pricing grid for mortgages, which were also "designed to strengthen our safety and soundness, and to improve our capital position over time," she said.

The GSE has also used credit risk transfers in the past yea to mitigate financial concerns. CRT activity rose to record high in 2022, according to Halley.

"We transferred a portion of this credit risk on more than $535 billion of mortgages through the program," Halley said. "As a result of our efforts, as of the end of last year, 40% of our single family guarantee book was covered by credit enhancement, up from 34%."