Fannie Mae reports drop in earnings as it keeps markets afloat

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Fannie Mae, like its smaller counterpart, eked out a reduced quarterly profit as it pivoted to address the coronavirus' disruptive effect on markets, including the one for its back-end credit-risk transfers.

"We expect it will be a difficult road ahead not only for Fannie Mae and its financial performance but more importantly the people whose homes are at risk because of the impact of the pandemic," CEO Hugh Frater said during the company's earnings call. "Our single-family servicing partners as well as our lender customers in both single-family and multifamily will experience demands unlike any they have seen since the 2008 financial crisis."

But more than a decade of improvements since that time should help Fannie Mae address the pandemic, Frater said.

"We enter this crisis from a position of relative strength," he said.

Despite the negative impact of the coronavirus in March, Fannie was able to generate $461 million in net income during the first quarter, down from $2.4 billion during the first quarter of last year and $4.4 billion in the fourth quarter of 2019.

In comparison, its competitor in the government-sponsored enterprise market — Freddie Mac — earned $173 million in the first quarter, down from $1.4 billion in the same quarter last year and $2.6 billion in 2019’s fourth quarter.

Fannie noted several developments stemming from the coronavirus and related policies that affected its earnings and forced it readjust its strategies.

Due to the disruption in the CRT market, for example, "the company does not anticipate engaging in back-end credit-risk transfer transactions in the near term," Fannie noted in its earnings release.

"Our expectation always has been that in periods of great economic and housing uncertainty we would not be able to issue these," Celeste Mellet Brown, executive vice president and chief financial officer at Fannie, said during the call.

Fannie is adjusting to the rapidly shifting conditions as it continues to serve as a source of liquidity for the market in a number of ways, such as by capping servicers' advancing responsibility for forbearance under the terms of the coronavirus rescue package.

The approximate share of single-family loans that have gone into forbearance as a result of the rescue package so far is 7%, but Fannie expects that number to more than double, Brown said.

Fannie has also provided liquidity by supporting sales of loans from less-sizable lenders who have found that the appetite of other investors has waned.

This could spur growth in the GSE's retained portfolio that may require consent from its regulator, Brown said.

The GSEs initially were ordered to shrink their retained portfolios to reduce the government's exposure to their risks, but more recently their regulator has been working on re-proposing a rule that would establish an improved risk-based capital buffer for them. The coronavirus has delayed plans for that rulemaking.

Under current standards, Fannie expects its capital requirements to grow in response to the introduction of risks from the coronavirus, said Brown.

Also affecting Fannie's results for the quarter, and going forward, is its implementation of the Current Expected Credit Losses accounting standard.

While certain entities — including banks — were given the option of delaying CECL implementation under the terms of the coronavirus rescue bill, the government-sponsored enterprises were not.

However, Fannie can get relief from categorizing loan modifications related to the pandemic as troubled debt restructurings under the bill, and CECL's implementation does have an upside, said Brown.

"There is actually a benefit to CECL," she said. "We believe that you have visibility into recoveries and you can reflect that in CECL."

Fannie also still plans to eventually switch to hedge accounting that reduces earnings volatility, the way Freddie Mac did earlier, but it has extended the timetable as to when that will occur.

"We are focused quite a bit on the work we need to do for borrowers and servicers at the moment, but hedge accounting is an important tool in any period," Brown said. "In particular, if we do need to increase the size of our retained portfolio as it relates to buyouts [and] also because of the size of the conduit, it will become an even more important tool for us."

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Earnings Fannie Mae GSEs Credit risk transfers Capital markets CECL Loan modifications Coronavirus