Fannie Mae reports dramatic capital gains in 3Q

Fannie Mae in the third quarter more than doubled its net worth compared to a year ago, which is likely to be helpful as it potentially faces new regulatory goals and the need to disclose more about its capital position.

The government-sponsored enterprise’s net worth for the quarter was $42.2 billion, up from $20.7 billion during the same period last year and $37.3 billion during the previous three months. (Fannie switched to hedge accounting in 2021, so previous results should be considered only roughly comparable given that they were calculated using a different methodology aimed at smoothing out quarterly swings in the market value that otherwise have disparate effects on securities and financial instruments used to manage their risks.)

Fannie’s gain in net worth follows a banner year for the mortgage industry that may be difficult to match, although some forecasts — like those of Fannie’s competitor, Freddie Mac — are relatively optimistic. Fannie’s latest earnings numbers remained strong but got closer to historic norms. It reported third-quarter net income of $4.8 billion, compared with $4.2 billion a year earlier and $7.2 billion in this year's second quarter.

“When we met last quarter to share our strong second- quarter results, I noted that they were against the backdrop of a very strong economy, continued low interest rates and a surge in home price growth. We saw these trends continue in the third quarter, but to a lesser degree,” David Benson, Fannie’s president and interim chief financial officer, said during its earnings call.

Refinance loans bought by Fannie have been dwindling but home-purchase mortgages have been picking up, in line with the typical shift in the market cycle when rates rise.

“Looking at more recent experience, refinance acquisitions were at their lowest since the first quarter of 2020 as many borrowers have already taken advantage of the low rate environment to refinance,” said Benson. He noted that the third quarter’s purchase share of 39% was the highest since the third quarter of 2019. Single-family originations bought by Fannie in the third quarter of this year totaled $115.4 billion.

The annual performance plan goals for the 2022 fiscal year that Fannie and Freddie’s regulator released the same day as their earnings make it clear that they aim to maintain their financial soundness while ensuring they’ll be consistently available to provide access to affordable and equitable lending,

In addition to measures in line with new diversity and inclusion, equity and affordable housing goals, the FHFA will issue a proposed rule on enterprise capital planning. Also in the performance goals is a plan for collecting feedback on and evaluating a newly implemented performance management system.

Fannie Mae shares acting FHFA Director Sandra Thompson’s "conviction that our housing mission, sustainability, safety and soundness are inextricably linked,” Fannie CEO Hugh Frater said during the earnings call.

Fannie plans to expand efforts to identify borrowers who might be served by its HomeReady low-downpayment loans, but may be excluded from traditional underwriting, Frater said, noting that this could be one key component of the GSE’s new equitable housing finance plan, which is due at the end of the year.

“We are actively listening to stakeholders as we prepare our plans, and listening sessions FHFA has organized will help make our plans stronger,” Frater said. “FHFA’s leadership on the issue of housing equity is in keeping with its actions across a broad range of areas. These include an expansion of our low-income housing tax credit investment activity and also FHFA’s recent decision to allow desktop appraisals on many purchase loan acquisitions in 2022.”

Fannie and Freddie's goals of ensuring their own financial soundness while remaining capable of supporting affordable housing programs are largely complementary, but the two initiatives may be at cross-purposes and are likely to create challenges in the coming year.

For example, the decision to roll back the adverse market fee charged for refinances did extend more access to credit to underserved borrowers with income constraints, but they also reduce some of their GSEs’ earnings and capital-building potential. Guarantee fee income at Fannie did decline because of that decision, but the reduction was relatively small, Benson said.

“There was a slight decline in the average g-fee charged for third-quarter acquisitions relative to the prior quarter from 47.9 basis points to 47.3,” Benson noted. “Removal of the adverse market refinance fee contributed to the fee decrease.