Fannie Mae, the much-beleaguered GSE, is reporting a financial scenario for 2012’s first quarter that stands in stark contrast to past reports – it’s positive.
After quarterly losses of $6.5 billion in the first quarter of 2011 and $2.4 billion in the same year’s fourth quarter, Fannie Mae earned a net income of $2.7 billion in 2012 Q1, a turnaround the firm is crediting to lower credit-related expenses from stabilizing home values and a decline in the company’s REO inventory.
Fannie’s income was so high, in fact, that it does not require funding from the Treasury, and it was able to reduce its total loss reserves from $76.9 billion on Dec. 31, 2011 to $74.6 billion on March 31, 2012. With that decline, the company is expecting its losses on pre-2009 loans to have peaked.
Michael J. Williams, the president and chief executive officer for Fannie, said progress is the name of the game with the GSE’s latest report.
“Today’s results exemplify the tremendous progress we have made since 2009,” he said. “Our financial performance has improved significantly and we successfully limited losses on the legacy book of business through our efforts to help homeowners avoid foreclosure.”
Susan McFarland, the executive vice president and chief financial officer of Fannie, said that for a number of reasons, the firm’s finances have dramatically improved.
“We expect our financial results for 2012 to be significantly better than 2011,” McFarland said. “Our credit performance is headed in the right direction with significant improvement since 2009, and we expect that the reserves we have built to cover future credit losses on the pre-2009 legacy book of business have reached their peak.”
Even with all that positivity, though, Fannie did admit in its report that its future financial performance depends upon a wide range of factors, given the size of the company’s guaranty book of business. The factors include: the mortgage market and other macroeconomic factors; loss mitigation activity; legislative or regulatory requirements; changes in borrower behavior, such as an increasing number of underwater borrowers who strategically default on their mortgage loan; and changes in accounting policy. Small changes to any of those factors could significantly impact Fannie’s finances.
The report was certainly more positive than negative, though, and with how Fannie has been approaching it underwriting and eligibility standards since 2009, things are expected to only improve with time. In 2012’s first quarter, Fannie’s single-family loans had an average FICO score of 763 and LTV ratio of 70 percent, and all of its loans since 2009 – which account for 56 percent of its single-family guaranty book of business – were made with similar standards.
Progress has also been made on the delinquency front. As of March 31, 2012, Fannie’s single-family delinquency rate was 3.67 percent, down substantially from the 5.47 percent in March 2010. The report cited home retention solutions, foreclosure alternatives,completed foreclosures and the company’s stronger post-2009 underwriting standards as reasons for the decline, which, McFarland noted, will be a big motivator in future growth for Fannie.
“As our serious delinquency rate declines and home prices stabilize, we expect to reduce our reserves, which combined with revenue from our high-quality new book of business, will drive our future results,’ she said. “While external economic factors continue to create headwinds that affect our results, we are pleased with our credit performance and will continue our work to move the housing market forward.”