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What is driving positive earnings for Fannie, Freddie?

FHFA explains the not-so-obvious answer

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Fannie Mae and Freddie Mac reported positive earnings in the third quarter of 2013, influenced by rising house prices which was largely driven by investor purchases.

For year-to-date through September 2013, national house prices rose 6%, according to the Federal Housing Finance Agency’s house price index, which counts purchases only and is seasonally adjusted.

National house prices rose 8.5% compared to September 2012.

Combined net income at the two government sponsored enterprises totaled $39.2 billion in the third quarter of 2013, mainly driven by these rising house prices.

GSEs also benefited from recoveries on counterparty settlement agreements with a number of financial institutions during the quarter.

Over the first three quarters of 2013, the GSEs reported combined net income of $117.6 billion, buoyed by each GSE releasing a substantial portion of its Deferred Tax Asset valuation allowance in 2013.

Rising house prices during the quarter continued to reduce expected defaults, and the level of credit losses associated with defaults on mortgages the GSEs guarantee, especially in those so-called sand states with some of the highest severity levels in recent years – Arizona, California, Nevada, and Florida.

The number of delinquent loans continues to trend downward at the GSEs, and this, coupled with stronger credit characteristics of newly acquired loans, has improved portfolio quality.

These factors resulted in a $6.1 billion decrease in the GSEs’ combined loan loss reservesduring the third quarter of 2013.

The reduction in loan loss reserves led to the GSEs reporting a benefit for credit losses of $3.7 billion.

Since December 31, 2012, combined loan loss reserves at the GSEs declined 21% or $20.1 billion to $73.4 billion.

Purchases of non- traditional and higher-risk mortgages continued to be minimal, and the average loan to value ratio for new business remained unchanged as borrowers continued to use the GSEs’ refinance programs, including the Home Affordable Refinance Program, targeting deeply underwater borrowers.

The post-conservatorship business (2009 to present) continues to become a larger piece of the total single-family portfolios as new business is added and homeowners take advantage of low interest rates to refinance existing loans.

This post-conservatorship business now accounts for almost three-quarters of the total single-family portfolio at both Fannie and Freddie.

Serious delinquency rates for these newer vintages remain at or below 1%. However, serious delinquency rates remain at a heightened level for loans originated between 2005 and 2008, which account for approximately 16% of the single-family portfolio.

In the first nine months of 2013, refinances accounted for 74% and 76%, respectively, of single-family new business volume at Fannie Mae and Freddie Mac.

Refinance activity decreased in the third quarter as mortgage rates rose.

The GSEs and Ginnie Mae continue to account for essentially all issuances of mortgage-backed securities. In the first nine months of 2013, the Enterprises accounted for $1,027 billion or 77% of MBS issuances.

There was a 43% decrease in dollar volume of loans originated for GSE loans.

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