After a record year of mortgage originations, the GSEs released their Q1 earnings for the year on Thursday and Friday, revealing that Fannie Mae and Freddie Mac are still riding the tail end of the market’s highs.

With both enterprises posting strong quarterly and year-over-year results, earnings calls reminisced of a quarter that had yet to be hit by pandemic-driven woes. Whereas Q4 conversations discussed the possibilities of exiting conservatorship, 2021’s Q1 results looked closely at their ability to provide for families in forbearance, and the uncomfortable adjustments that came with amendments to the Preferred Stock Purchase Agreements.

It is important to note that Fannie Mae focused on comparing its Q1 numbers to Q4, while Freddie Mac compared its Q1 numbers year-over-year.

Fannie Mae

Fannie Mae, the largest mortgage financier in the U.S., reported a $5 billion net income for Q1 compared with $4.6 billion in Q4 of 2020. It also boosted its net worth to $30.2 billion as of March 31, up from $25.3 billion at the end of Q4.

First-quarter mortgage acquisitions hit the second-highest level in the GSE’s history at $422 billion, but were down 7% from the record fourth quarter. For single-family homes in particular, Q1 acquisitions declined $25 billion to $400 billion, a result of a seasonal decrease in purchases, Fannie stated. Unsurprisingly, the GSE continued to pump the refi market as refinance volume went virtually unchanged in Q1, coming in at $301 billion.

“You will recall that certain restrictions on our single-family acquisitions were included in the January amendment to our senior preferred stock purchase agreement,” said Celeste Mellet Brown, Fannie’s executive vice president and chief financial officer. “So far, these have had minimal impact on acquisitions, but we continue to work on implementation of the new restrictions.”

Hugh Frater, Fannie’s CEO, noted an important caveat during the media earnings call on Friday  – given the continued surge in volume, Fannie’s net worth to asset ratio barely moved while its capital requirement actually increased within the first quarter.

“In my view, this undercapitalization is unsustainable, and it exposes the taxpayer and the housing finance system to risk,” Frater said.

During the Mortgage Bankers Association’s spring conference, FHFA Director Mark Calabria called for another round of PSPA amendments “to deal with the capital stack.” According to Calabria, Fannie’s and Freddie’s capital is the binding constraint on the risk, footprint and activities they can take. Without the ability to retain that capital, there would only be an extension of shrinkage.

“I’m in a situation where we continue to retain earnings, but given the structure of the balance sheets as they are today, It will be very difficult if not impossible to raise outside capital,” Calabria said.

Looking ahead, the GSE expects the next quarter to be strong, although there is a good chance the refi market will begin to cool off. Fannie’s mortgage purchase originations are forecasted to increase by about 15% to $1.9 trillion in 2021, whereas refinance volume will remain elevated through the second quarter before returning to normalized levels.

“We expect lower refinance volumes will affect our financial results as fewer loan prepayments will lead to lower amortization income,” said Brown. “Record refinancing volume has driven significant growth in amortization income in the last year. In the first quarter, net amortization was $2.5 billion compared to $1.5 billion in the first quarter of 2020.”

Freddie Mac

Looking at Freddie Mac, the GSE reported a net income of $2.8 billion for the first quarter of 2021, an increase of $2.6 billion year-over-year, which it attributed to higher net revenues and lower credit-related expenses. In the single-family segment, net income increased by $1.3 billion from last year’s first quarter to $1.7 billion.

According to a press release on Thursday, first-quarter net revenues totaled $5.3 billion, a 120% jump from the year prior.

The GSE can attribute the massive year-over-year increases to the pandemic-driven surge the housing market experienced last year, with Freddie’s Chief Financial Officer Christian Lown pointing to growth in its single-family mortgage portfolio and faster loan prepayments as a result of the low mortgage rate environment.

“Freddie Mac continued to support homebuyers and renters, providing $377 billion of liquidity for home purchases, refinancings, and the multifamily market in the first quarter of 2021,” Lown said. ” Our funding helped 1.4 million families purchase, refinance, or rent a home – a significant increase compared with the 637,000 we supported in the first quarter of 2020.”

Freddie’s earnings statement also acknowledged the changes to the terms of its PSPA, stating the liquidation preference of the senior preferred stock increased to $89.1 billion on March 31, 2021 based on the $2.5 billion increase in its Q4 net worth, and will increase to $91.4 billion on June 30, 2021 based on the $2.4 billion net worth bump 2021’s first quarter saw.

Overall, Freddie Mac nearly doubled its net worth year-over-year, jumping from $9.5 billion in Q1 2020 to a whopping $18.8 billion by the end of Q1 2021.