Fannie reclassifies certain assets, sees big earnings boost

Fannie Mae's treatment of a reperforming loan package in the second quarter helped it drive up earnings by almost 41% to $4.5 billion from a year earlier, delivering a stronger dividend to the Treasury Department just ahead of a leadership change.

The agency’s results were also significantly improved from the first quarter, when it only paid a $900 million dividend off of $4.3 billion in earnings because it needed to rebuild capital.

"We've recovered from a financial point of view," President and CEO Tim Mayopoulos, who plans to depart at year-end, said in an interview. "We expect to be profitable on an annual basis going forward."

An accounting reclassification of loans to the "held for sale" category helped give Fannie's earnings a slight lift in the quarter, Chief Financial Officer David Benson said during a response to a question during the company's earnings call.

Benson will become president next week in preparation for Mayopoulos' departure, as Deputy CFO Celeste Brown takes over Benson’s role.

Fannie routinely reclassifies loans as it prepares for sale, but the process added more to earnings in this period because one package of reperforming loans going through reclassification was particularly sizable, Benson said in an interview.

"The notable issue that we had here was that we had quite a large sale of reperforming loans that was completed in July and those redesignations happened in the second quarter," Benson said.

The package in question totaled $6 billion, he said. Packages more typically have ranged in size from hundreds of millions of dollars to $2 billion.

Also during the quarter, Fannie proceeded with real estate mortgage investment conduit elections for its loans that later could help broaden the investor base for its credit risk transfer securities.

Other highlights of the fiscal period included a decline in Fannie's serious delinquency rate to a level below 1%.

This brings Fannie's serious delinquency rate more in line with where it was before loan performance issues from an unusually bad hurricane season last year drove it to 1.24%.

Fannie additionally plans to eventually switch to hedge accounting, something its smaller rival, Freddie Mac, adopted previously with the aim of reducing the volatility and competitiveness of its earnings statements. Fannie first delayed this to await regulatory rulings on some issues, and later extended the timeline because of other demands on its accounting resources that are more of a priority, Benson said in an interview.

Freddie also was able to return to paying multibillion-dollar dividends in the second quarter. This suggests both government-sponsored enterprises have recovered from one-time adjustments related to tax reform in the fourth quarter of 2017 that depleted their capital and forced them to take Treasury draws.

So far, dividends at both agencies have exceeded drawdowns on a net basis since the GSEs entered conservatorship in the wake of the Great Recession.

But the GSEs could face more challenges to their profitability in the future as a result of a mandatory accounting change, according to analysts.

Both Fannie and Freddie also are facing other types of organizational uncertainty.

The Federal Housing Finance Agency, which serves as the conservator and regulator for the GSEs, is currently considering drawing up new capital requirements for them.

And leadership at the FHFA as well as at Fannie Mae is in flux. FHFA Director Mel Watt plans to leave in January, and there is speculation he could depart sooner over allegations he sexually harassed a former employee. In addition, the agency's constitutionality has also been questioned in court.

Adding to uncertainties about Fannie and Freddie's future is a recent Trump administration reform plan that, similar to certain past proposals, would privatize the GSEs but preserve the federal guarantee for their mortgage-backed securities.