Largest refinancing volume since 2003 logged by Fannie Mae in 2Q
While the broader economy took a walloping in the second quarter, Fannie Mae's earnings over that period showed an improvement from the first quarter — with the company logging the highest refinancing volume since the third quarter of 2003.
The government-sponsored enterprise ascribed the improved earnings to having lower credit-related expenses at the same time that it ramped up its mortgage purchase activity.
"Our performance during this period benefited from strong underwriting practices that we've had in place for the last 10 years," said CEO Hugh Frater during its conference call.
Fannie Mae reported second-quarter net income of $2.55 billion, up from $461 million in the first quarter. For the second quarter of 2019, Fannie Mae had net income of $3.43 billion.
Credit-related losses fell to $22 million in the second quarter from $2.7 billion in the first quarter.
Fannie Mae's single-family mortgage loan acquisition activity in the second quarter was over $350 billion, an increase of 84% compared with the first quarter. The increase was driven by a $137 billion rise in refinance volume to $259 billion, the most since the third quarter of 2003.
"Our presence in the market made it possible for more than 1 million homeowners to purchase a home or refinance their mortgage at lower rates during the second quarter," Frater said.
During the presentation, Frater specifically mentioned community lenders, independent mortgage bankers, credit unions and small financial institutions "that rely heavily on our whole loan purchases for the liquidity they need to serve their customers.
"For many of these lenders, Fannie Mae was a stable lifeline," Frater said.
When it comes to the effect of COVID-19 on Fannie Mae's financials, "there remains a high degree of uncertainty about the pandemic's path and wide-ranging effects," said Celeste Mellet Brown, executive vice president and chief financial officer.
Based on loan count, Fannie Mae estimated that 5.7% of its single-family mortgage portfolio was in forbearance as of the end of June. About 1.2% of its multifamily mortgages were in forbearance by that time, as indicated by unpaid principal balances.
Of the single-family loans actively in forbearance at the end of the second quarter, 21% had a credit score below 680, compared with 10% for all single-family loans on its books, Brown said.
At the same time, 18% of forborne mortgages had a mark-to-market loan-to-value ratio over 80%, compared with 13% of the total book.
Fannie Mae's single-family seriously delinquent loan rate increased to 265 basis points, up 200 bps compared with the first quarter. The multifamily rate rose to 100 bps, up 95 bps, which was because of the coronavirus, Brown said. But excluding loans in forbearance, the rate is 69 bps for single-family and 9 bps for multifamily.
Fannie Mae had a loan loss allowance of $200 million at the end of the quarter, flat with the first quarter.
"We expect this allowance to grow as our population of delinquent loans increases and loans extend [their] time in forbearance," Brown said.
When asked about the possible impact of the Current Expected Credit Loss accounting standard, she noted that in the case of COVID-related forbearances, because the expectation that most of the borrowers will be able to repay, "the impact to us is smaller. Where CECL increases the potential losses associated with a downturn, is when you don't have the visibility into the ability or the timing which the borrower could repay. In this case CECL is beneficial because of the lifetime look-through," said Brown.
At the end of his prepared remarks, Frater addressed housing and race.
"For all the good work Fannie Mae has done in 2020, the future is full of challenges. One of those challenges, surely, is reckoning with our country's legacy of racism."
Fannie Mae's role in helping to provide housing finance brings with it certain responsibilities, and it is looking forward to partnering with those that can bring about change he said.
"We can do better and we will," he said. "I expect many stakeholders that rely on Fannie Mae will help us keep that pledge. Looking forward, our focus for the rest of 2020 is on change," and that includes "creating opportunities for everyone to have access to housing they can afford."