"Some people suggest we slavishly follow FICO. That is not true. We evaluate credit data through own automated system [Desktop Underwriter]. And form our own judgments about the creditworthiness," said Timothy Mayopoulos, president and CEO of Fannie Mae.
"Some people suggest we slavishly follow FICO. That is not true. We evaluate credit data through own automated system [Desktop Underwriter]. And form our own judgments about the creditworthiness," said Timothy Mayopoulos, president and CEO of Fannie Mae. Bloomberg News

Fannie Mae was affected by the same derivatives accounting mismatch that led to Freddie Mac's first quarterly loss in four years. But its bulk and balance sheet provided enough cushion for the larger of the two government-sponsored enterprises to post a profit for the third quarter.

Fannie's third-quarter net income of $2 billion was roughly half of the $3.9 billion it earned a year ago and the $4.6 billion in net income earned during the second quarter of 2015. But while the hedging instrument accounting issues create "significant volatility" to Fannie's quarterly and annual reporting CEO Timothy Mayopoulos expects the company to remain profitable on an annual basis.

"We have the same type of volatility that our competitor does. In the second quarter you see that we had fair value gains, and in the third quarter we had fair value losses," Mayopoulos said in an interview with NMN. "There's just a little bit of difference between us and them. I think that we always have a larger revenue base to absorb those fair value losses in a particular quarter and I think that the makeup of the assets that sit on their balance sheet and the makeup of their debt structures are different."

Fannie will pay $2.2 billion to the U.S. Treasury for the third quarter, bringing the total dividends paid to $144.8 billion. Fannie has taken total draws of $116.1 billion from the Treasury since 2008, though the dividend payments do not count as repayment.

The two GSEs had a long run of profitability prior to Freddie's third-quarter loss. However, remaining profitable will become more challenging as they shrink portfolios in line with regulatory directives, and Treasury officials have shown concern about its exposure to the GSEs' risks.

"Freddie Mac's reported quarterly earnings loss is accounting-driven and does not reflect a deterioration in the underlying health of its business," Treasury spokesperson Rob Runyan said via email in response to a request for comment. "Nevertheless, the prospect of any material losses by the GSEs is another reminder that comprehensive housing finance reform is necessary. Taxpayers remain on the hook for losses incurred by the GSEs."

The performance of both GSEs' mortgages has improved, reducing the Treasury's risk, noted Mayopoulos, who added Fannie is also making fewer loan repurchase requests of lenders.

Of the 1.9 million single-family loans Fannie acquired in 2014, the GSE issued initial repurchase requests on less than 7,700. Ultimately, less than 1,900 of those loans were repurchased, he said. 

Mayopoulos said buybacks of originations from the years leading up to the crisis were "much, much" higher. During the first three quarters of 2013 alone, Fannie initially requested repurchases on 8,200 of loans delivered to the GSE, Mayopoulos said at the 2014 Mortgage Bankers Association convention.

When Fannie Mae data is revised to include repurchases after liquidation, the numbers are higher than they were under the agency's traditional methodology, according to the Urban Institute's Housing Finance Policy Center. By this measure, the center finds that there were 3,105 repurchases in 2014, down from 5,161 in 2013. Freddie, unlike Fannie, has traditionally included post-liquidation repurchases. When both GSEs use that methodology, the two agencies' numbers "look very comparable," said Laurie Goodman, the center's director.

Fannie more recently has begun including post-liquidation repurchases in its data and been revising its older numbers, said Goodman. But it's unclear whether this accounts for discrepancies between Fannie's aforementioned data for 2013 and 2014 relative to the center's, she said. Fannie spokeswoman Katie Penote declined to comment on what might account for the differences in the two sets of data.

Technology that collects and gives lenders more feedback on borrower and property data in their loan submissions, as well as revamped timelines for when lenders are liable for buybacks have reduced repurchase demand, said Mayopoulos.

"I think there also has been much greater focus in lender shops on originating high-quality loans," Mayopoulos said.

Both Fannie and Freddie have resumed purchasing 3% down payment loans, a practice they pulled back from at one point and then resumed. The move has its critics who claim the lower equity positions of these loans leaves borrowers with less incentive to repay their debts.

The GSEs' regulator, the Federal Housing Finance Agency, has maintained that lenders still have room to lend to a wider range of borrowers within Fannie's guidelines without taking on undue credit risk in order to fulfill their affordable housing mission.

And if lenders and the GSEs maintain other credit standards while raising the loan-to-value ratio, 3% down payment products will perform well, said Equifax chief economist Amy Crews Cutts.

"You can really mitigate those risks and balance those risks. There's a big difference between 3% and no percent down. I'm worried when all the types of underwriting worsen at the same time," she said.

Mayopoulos said Fannie Mae has not layered underwriting risks.

"When we rolled out HomeReady, our 97% LTV product, we very consciously did not change the scope of our credit box that was very consistent with the credit standards we already had in place," he said. "What we've experienced is that lenders are not delivering to the full scope of our credit box so one of the things we're trying to do with products like HomeReady is to create conditions that will allow lenders to lend to the full range."

Mayopoulos said first-time homebuyer numbers are in line with historical norms last seen in the early 2000s, but move-up buyers are less active due to weak employment and wages.

"That's where we see a big gap. It's not necessarily with the first-time homebuyer. It's seeing that trade-up buyer, which actually constrains the supply for first-time buyers of housing," he said. "We think that the products we have available are products those buyers would need, but I think it's largely being driven by general economic conditions."

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