National Mortgage News 8/04/16 – Trouble Looms Ahead for Fannie After Strong 2nd Qtr

Trouble Looms Ahead for Fannie After Strong 2Q

By Bonnie Sinnock
August 4, 2016 

“We expect to remain profitable on an annual basis for the foreseeable future,” said Fannie Mac CEO Timothy Mayopoulos. 

Bolstered by reduced rate-driven fair value losses and higher home prices, Fannie Mae recorded a second consecutive quarter of positive earnings, making $2.9 billion.

While up from $2.4 billion in the first quarter, it was lower than a year earlier, when the government-sponsored enterprise made $4.6 billion.

“We expect to remain profitable on an annual basis for the foreseeable future,” said CEO Timothy Mayopoulos during a conference call Thursday with reporters.

But he reiterated past warnings that there may be more quarter-to-quarter volatility reflecting changes in interest rates and home prices, as well as an increased possibility of losses because of regulatory directives to reduce capital to zero by 2018.

That issue is also faced by Freddie Mac, but because it is smaller and has a different balance-sheet makeup, it has experienced a small net loss under generally accepted accounting principles in two of the last four quarters. It was profitable in the most recent one.

Some lender groups remain concerned about the GSEs’ earnings volatility, urging the Treasury Department to change the “sweep agreement” that requires them to pay all their profits to the government.

“Today’s earnings report shows how contrived the Sweep Agreement is. A loss next quarter just slightly higher than this quarter’s gain would result in a Treasury advance even though they balance each other out,” said the Community Home Lenders Association in a press release responding to Freddie’s recent earnings results. “The simple answer is that the GSEs should be able to keep these modest profits in good quarters to balance potential small losses in future quarters.”

Both Freddie and Fannie found rates and home prices were relatively favorable in the second quarter.

Decreases in long-term rates that lead to fair value losses continued, but these declines were less pronounced than in the previous quarter. Home price gains and decreased foreclosure property expense also bolstered earnings relative to the first quarter, according to Fannie.

Even though loan performance is currently very strong, loan-loss reserves at Fannie have remained high relative to pre-crisis. This is primarily because of modified loans from the crisis era that remain on Fannie’s balance sheet, said Dave Benson, vice president and chief financial officer of the GSE.

“We would expect to have elevated reserve levels for as long as we have elevated levels of those loans on our balance sheet,” he said.

There are plans to re-securitize and market those loans over time, but it won’t have a major impact on reserves, said Mayopoulos. Fannie will guarantee those bonds and remain exposed to their credit risk, said Benson. “The loans will still be consolidated on our balance sheet,” he said.

Mayopoulos also noted four ongoing “areas of progress” at Fannie: improved underwriting standards and loan performance, increased reliance on guarantee fees for revenue, growing amounts of credit risk transfer transactions, and technology initiatives aimed at expanding “safe and sustainable” housing for the owners and renters that its seller-servicers serve.

“Technology is dramatically raising the bar as to what consumers expect from the mortgage experience,” Mayopoulos said. “Our job is to help our lender partners meet those expectations. We are working to provide smart tools to give lenders real-time verification of the key components of the credit quality of loans that we acquire, these tools make it easier to do business with us and provide our customers with more certainty that a loan sold to use will stay sold. We are also bringing innovations to market expand access to credit for qualified borrowers.”

Lenders are watching Fannie’s technology initiatives closely, particularly its promised update of Desktop Underwriter and an upcoming requirement to provide the GSE with trended data from two of the credit bureaus, said Stan Baldwin, chief operating officer of credit reporting agency Informative Research, a company that provides merged reports from the bureaus to lenders.

Although Fannie has postponed its trended data implementation, lenders started contending with some of the costs associated with it this month, and they have ongoing concerns about Fannie’s lack of detail related to how it might utilize the information, he said.

While Fannie has stated its technology initiatives will broadly be in line with efforts to expand the credit box and improve the timeliness of feedback on underwriting, some lenders are concerned trended data could tighten or slow underwriting, according to Baldwin.

“They just don’t see how this is necessarily going to open it up,” he said.

There have been short-term technology concerns in terms of accommodating the processing of increased amounts of data involved in the initiative, but in the long-term, the jury is still out as to whether the transition will be a smooth one or not when Fannie makes the requirement official, he said.

“It could be another Y2K,” said Baldwin, referring to a technology upgrade made to accommodate the transition to the year 2000 in systems that many feared would be hugely disruptive, but turned out not to be.


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