Expected losses from the recent hurricanes put a dent in Fannie Mae's third-quarter earnings and the mortgage agency is keeping a close eye on how its servicers manage the pressures of the recovery effort.
"Servicers are having challenges," especially in Puerto Rico, where there are fewer companies that manage loans, Fannie Mae President and CEO Timothy Mayopoulos said in an interview.
But he added that, "I haven't heard any servicer say they are not capable."
About 80% of the $1 billion that Fannie Mae set aside during the third quarter for hurricane-related expenses is expected to cover losses on single-family loans in Puerto Rico. About two-thirds of the $900 million that Freddie Mac set aside for hurricane losses is earmarked for Puerto Rico.
"If you put aside the hurricanes, our earnings were very much in line with what we have expected," Mayopoulos said. The agency earned $3 billion in net income during the quarter, down from $3.2 billion in both the previous quarter and a year ago.
Despite the increased reserves for the hurricanes, Fannie's combined loss reserve was $20.5 billion in the third quarter, down from $20.7 billion in the second quarter, due to the improving housing market.
The hurricane loss reserve estimates have a high margin of error, and there is no doubt they will be "adjusted up or down" to one degree or another going forward, he said. The storms are putting more stress on the agency's reserves, which are declining.
Fannie is considering extending its broader approach to automating processes for lenders and servicers in order to make their work more efficient to disaster relief in response to the hurricanes.
"We're trying to reduce the number of steps involved in any of these processes automate as much as practical," Mayopoulos said.
To date, however, existing disaster relief policies that allow servicers to suspend or reduce mortgage payments and the evolution of post-crisis loss mitigation appear effective, Mayopoulos said.
Maria "had more qualities than Katrina, but probably worse in many respects than Katrina," Mayopoulos said during Fannie's earnings call Thursday, referencing the 2005 storm that was one of the most devastating hurricanes to hit the United States in recent decades.
Visibility into the damage in Puerto Rico from Hurricane Maria, which hit late in the third quarter, is still in some cases limited by difficulties accessing the properties that have required some reliance on a drone view of the damages, Chief Financial Offer David Benson said during the call.
Like Freddie, Fannie was able to offset some of its losses with a settlement related to private-label residential mortgage-backed securities it purchases. This resulted in a $975 million pretax gain.
The possibility of tax reform that could temporarily hurt earnings, and declines in both agencies' capital buffers, also continue to be concerns. It remains possible that this could lead to additional Treasury draws, Mayopoulos said.
Outside of these concerns and hurricanes, national housing and mortgage market fundamentals affecting Fannie's core business are strong with some moderation in the declining serious delinquency rate expected beyond that caused by the hurricanes, Mayopoulos said.
The longer-term moderation in delinquencies reflects the runoff of distressed legacy loans from the pre-crisis era through nonperforming loan sales and other loss mitigation efforts. This runoff occurs at different rates depending on the foreclosure process for a particular jurisdiction, Mayopoulos noted.