FHFA’S 2013 Report Shows Record Income for Fannie Mae and Freddie Mac, But Earnings Are Likely to Fall

On Friday, Federal Housing Finance Agency (FHFA) released its 2013 Report to Congress, revealing recent GSE milestones but anticipating future problems. The annual report is statutorily-required under the Federal Housing Enterprises Financial Safety and Soundness Act of 1992, as amended by the Housing and Economic Recovery Act of 2008 and the Dodd-Frank Wall Street Reform and Consumer Protection Act, which require the FHFA to report on the agency’s plans to “continue to support and maintain the nation’s vital housing industry, while at the same time guaranteeing that the American taxpayer will not suffer unnecessary losses.”

Presented by FHFA Director Melvin Watt, the 2013 Report provides a detailed review of the safety and soundness of Fannie Mae, Freddie Mac, the 12 Federal Home Loan Banks (FHLB) and the FHLB’s Office of Finance. As noted by Watt in his cover letter to the Report “it also details FHFA’s actions as conservator of Fannie Mae and Freddie Mac during 2013, as well as the agency’s regulatory guidance, research and publications.”

This year, the FHFA reports that 2013 record net income for Fannie Mae and Freddie Mac was greater than ever before, but also reports that certain unique benefits received in 2013 relating to realization on deferred tax assets and decreased allowance for loan and lease losses mean that 2013 levels of net income won’t be repeated any time soon.

Not surprisingly, the Report points out that Fannie Mae and Freddie Mac have almost eliminated the practice of purchasing higher-risk mortgages, such as no-income documentation or interest-only mortgages. But the Report also notes that continued losses from Fannie Mae’s and Freddie Mac’s high levels of problem assets already on the books and a reduction of settlement income from securities litigation are likely to drive down future earnings for both enterprises. As previously reported by Watt in FHFA’s Strategic Plan for 2014, it will be necessary to expand private-sector investment if Fannie and Freddie are going to continue their dominance of the mortgage market.