On Thursday, both Fannie Mae and Freddie Mac released their second quarter financial results. It was a particularly profitable quarter for the GSEs, although the spectre of a post-forbearance, post-government assistance housing market looms over the numbers.
Fannie’s second quarter
Fannie Mae reported a net income of $2.5 billion for the second quarter, a massive increase of over $2 billion compared to Q1. Fannie attributed the increase to a decline in Q2 credit-related expenses, which swelled considerably in the first quarter due to COVID-19’s disruption of the U.S. economy. Fannie Mae’s net worth grew from $13.9 billion on March 31 to $16.5 billion on June 30.
At the end of June, 5.7 percent of Fannie Mae’s single-family guaranty book of business and 1.2 percent of its multi-family guaranty book of business were in forbearance, with the “vast majority” of the more than 970,000 loans in forbearance being related to COVID-19, the GSE said in a press release accompanying the report.
“In the second quarter, we helped hundreds of thousands of homeowners and renters get the guidance and support they needed to stay in their homes, while we delivered on record financing demand,” Fannie CEO Hugh Frater said in the release.
In the first half of 2020, Fannie Mae provided $542 billion in single-family liquidity, enabling the financing of approximately 593,000 home purchases and a mind-boggling 1.35 million refinances. In the multi-family space, Fannie provided $34 billion, resulting in the financing of 373,000 units.
The GSE did not enter any credit risk transfer transactions in Q2, and attributed its aversion to the ongoing market instability brought on by COVID-19. Fannie currently has no plans to engage in additional transfer transactions while the company evaluates the FHFA’s recently re-proposed capital rule, which would reduce the amount of capital relief Fannie would receive from these transactions.
While over at Freddie Mac…
Freddie’s second quarter net income also experienced a healthy jump, from roughly $200 million in Q1 to $1.8 billion in Q2. The $1.3 billion increase in comprehensive income from quarter to quarter was attributed to higher investment gains resulting from higher spreads and higher margins on new loan commitments in the multi-family space, lower credit-related expenses that reflect updated estimates of expected Q2 credit losses, and a combination of higher net interest income and guarantee fee income.
“We earned a solid $1.9 billion of comprehensive income while expanding our efforts to support homeowners, renters, multifamily borrowers and lenders affected by the pandemic,” said Freddie’s CEO, David Brickman, in a statement accompanying the report.
New single-family business activity was a whopping $232 billion in Q2, the highest Freddie has seen since 2003, while new multi-family activity reached $20 billion. Year-over-year, Freddie’s single-family and multi-family guarantee portfolios grew by seven and 13 percent, respectively.
There was a spot of cloudiness where risk is concerned. Freddie completed over 110,000 loan workouts in the second quarter – 10 times the number seen in Q1 – including 104,000 forbearance agreements. Just under four percent of the GSE’s single-family portfolio and 2.4 percent of its multi-family mortgage portfolio were in forbearance during the quarter; credit enhancement coverage on the two portfolios were 54 and 87 percent, respectively.
Reading between the lines
The numbers certainly put a happy spin on three months of economic brutality. SRE Mortgage Alliance’s chief revenue officer, John G. Stevens sees that as an issue: Neither GSE contextualized its growth by emphasizing the outsized influence of government relief programs and artificially low rates in driving consumer activity.
“These aren’t typical, day-at-the-office increases for either of those companies,” Stevens says. “Because if it weren’t for the government intervention because of COVID, I don’t think we would have seen those kinds of numbers come out,” Stevens says.
Stevens doesn’t see how Fannie’s or Freddie’s future quarterly reports will be able to deliver the same amount of good news: The external string-pulling that’s fuelling purchase and refi demand can’t last forever.
“These numbers aren’t sustainable,” he says. “You cannot have interest rates continue to be so amazing. It’s great for the consumer, but long-term, is it great for the economy?”