Strong Earnings at Fannie/Freddie After 4th Quarter Accounting Losses
Both government sponsored enterprises (GSEs) reported strong earnings in the first quarter of 2018. In separate announcements this week Freddie Mac said it had comprehensive income of $2.2 billion and Fannie Mae reported $3.9 billion. Both had posted heavily losses in the fourth quarter of 2017 due to changes in the tax law which necessitated write-downs of their net deferred assets.
Freddie Mac said its comprehensive income and its net income of $2.93 billion were driven by a $0.4 billion benefit from the new corporate tax rate, and continued growth of its guarantee book of business. The book grew by 5 percent year-over-year to $2.05 trillion. The Comprehensive income was nearly identical to the first quarter of 2017, but the tax changes had reduced income in the fourth quarter from $2.1 billion to a negative $3.3 billion, necessitating a draw from the Treasury Department for the first time since 2012.
The company had net interest income of $3.02 billion, down from $3.50 billion the previous quarter and the $3.80 billion in the same quarter of 2017. Non-interest income was $1.83 billion compared to $1.32 billion and $1.46 billion in the two earlier periods.
The company experienced gains of $0.2 billion from market spreads tightening and $0.2 billion from legacy asset dispositions. These were partially offset by $0.2 billion loss from interest rate impact. All numbers are after-tax. The report says the small loss from interest rate impacts reflects the company's implementation of fair value hedge accounting beginning a year earlier. This significantly reduced the company's accounting sensitivity to changes in interest rates.
The single-family portion of the guarantee portfolio grew 3 percent year-over-year to $1.84 billion while the multifamily guarantee portfolio increased by 30 percent to $213 billion.
Freddie Mac said it provided approximately $80 billion in liquidity to the mortgage market, funding 282,000 single family and 152,000 multifamily rental units during the first quarter. The company has transferred a portion of the credit risk on 39 percent of the single-family guarantee portfolio, up from 30 percent a year ago and a large majority of credit risk on 90 percent of the multi-family portfolio.
Fannie Mae said its net income of $4.3 billion and comprehensive income of $3.9 billion in the first quarter compared to a net loss of $6.5 billion and comprehensive loss of $6.7 billion in the fourth quarter, both also a result of reclassifying net assets for tax purposes. Both comprehensive and net incomes in the first quarter of 2017 came in at $2.77 billion.
Pre-tax income was $5.4 billion compared to $5.0 billion in the prior quarter and $4.16 billion a year earlier. Net interest income was $5.23 billion, compared to $5.11 and $5.35 billion. Fee income was $320 million against $4.31 million and $2.49 million.
Fannie Mae provided approximately $113 billion in liquidity to the single-family mortgage market and $11 billion in multifamily financing in the first quarter of 2018. The combined total enabled the financing of 638,000 units of residential housing. Of the total, 154,000 units were multi-family rentals, 90 percent of which were affordable to families earning at or below 120% of the area median income.
Fannie Mae is also transferring significant portions of the credit risk on both their single and multifamily mortgages. As of March 31, 2018, $995 billion in single-family mortgages, or approximately 34 percent of loans in the company's single-family conventional guaranty book of business, were covered by a credit risk transfer transaction and nearly 100 percent of its new multi-family business volume had lender risk sharing.
After their fourth quarter losses both GSEs are rebuilding their capitol buffers. Fannie Mae expects to pay a $938 million dividend to Treasury by June 30, 2018 while Freddie Mac will not be required to pay any dividend.