Fannie Mae's earnings up along with higher home values

Higher home prices drove Fannie Mae's 2023 earnings up 35% year over year, CEO Priscilla Almodovar declared during the company's earnings call.

Last year, Fannie Mae earned $17.4 billion, compared with $12.9 billion the prior year. In the fourth quarter alone, the government-sponsored enterprise earned $3.94 billion, down 16% from the third quarter's $4.7 billion. For the same period in 2022, it did $1.4 billion.

"The strength in home prices throughout the year had a direct impact on our earnings, largely due to the release of credit reserves that reflected higher actual and forecasted home prices," Almodovar said.

Fellow GSE Freddie Mac reported a 65% gain in fourth quarter net income on Feb. 14, also due to rising home prices.

"We recognized a $1.7 billion benefit for credit losses in 2023 primarily due to stronger than expected actual and forecasted home prices," Chryssa Halley, chief financial officer pointed out. "Conversely, in 2022, we recorded an over $6 billion provision for credit losses."

During the year, for both single-family and multifamily, Fannie Mae provided $369 billion in liquidity.

Almodovar, who will soon additionally take on the title of president at the GSE, touted several initiatives undertaken to reduce the upfront cost to borrowers of housing and expanding access, including the use of rental payments and the acceptance of attorney opinion letters in lieu of title insurance.

Appraisals is another area where it is looking to cut costs. "We continue to modernize the home valuation process by using models and analytics that allow us to offer less costly appraisal waivers and alternatives," Almodovar said. "Through these options low to moderate income borrowers save an estimated $52 million in upfront costs in 2023."

Even though Fannie Mae's net worth as of Dec. 31, 2023 was nearly $78 billion, that was still $243 billion below the level for its regulators to consider the company to be fully capitalized.

"While our base guarantee fee income grew slightly in 2023, higher interest rates during the year drove a decline in deferred guarantee fee income due to lower refinance activity," Halley said. "This was offset by an increase in income due to higher yields on securities in our corporate liquidity portfolio."

In fact, 86% of the acquisitions for its single-family book of business by year-end were purchase mortgage loans, Halley said. Those numbers are in line with recent rate lock data released by Optimal Blue.

Still, Fannie Mae's acquisition of $316 billion in single-family loans last year was a nearly 50% decrease compared to 2022 and its lowest volume since 2000, Halley said

Its single-family segment reported net earnings of $3.3 billion in the fourth quarter, down 18% from the third quarter's $3 billion. For the same period in 2022, this business line earned $10.8 billion.

Full year profits, though, were 38% higher versus the comparable period, $14.86 billion in 2023 to $10.77 billion for 2022.

"Nearly 85% of our single family book as of year-end had interest rates below 5%," Halley stated. "So even if interest rates decline meaningfully, most of the borrowers whose loans are in our single family book still would not be incentivized to refinance."

The share of single-family borrowers who were considered seriously delinquent at the end of 2023 fell 10 basis points from the prior year, to 0.55% from 0.65%.

Fannie Mae executed 17 credit risk transfer transactions during 2023, covering $308 billion of unpaid principal balance. Because of a capital rule change by the Federal Housing Finance Agency in March 2020, Fannie Mae stopped doing CRT altogether for nearly a year-and-one-half until that change was reversed by current Director Sandra Thompson. On the multifamily side, full year net income rose to $2.55 billion from $2.15 billion for 2022. Fourth quarter net income of $639 million was down from $674 million in the third quarter and $2.2 billion one year ago.

The year-over-year improvement in multifamily earnings was due to a lower credit loss provision, $495 million in 2023 versus $1.25 billion in 2022. The large 2022 provision was attributed to problems in the seniors housing loan portfolio.

"Our seniors housing loans did not drive our multifamily provision for credit losses in 2023 because of loss mitigation activities we performed last year and some recovery and property financials," Halley said. "However, our allowance for seniors housing loans remained elevated."

Acquisitions, though, were down 24% from 2022, affected by high interest rates.

The current rate environment could also affect the ability of the loans already in the portfolio to refinance prior to maturity.

Approximately 20% of outstanding commercial and multifamily loans are expected to mature this year, according figures released earlier this week by the Mortgage Bankers Association. Multifamily across all investor types represents a 12% share of that.

Fannie Mae's near-term rate of loans maturing remains low, however, Halley said, at 2% for this year and 3.5% for 2025.

Multifamily serious delinquency rates rose to 46 basis points at year-end from 24 basis points on Dec. 31, 2022, driven by the stress in the senior housing portion of the portfolio, Halley said.