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Fannie Mae execs see path to exit conservatorship

Net worth increased to $25 billion in a year of historic volumes

Fannie Mae, the largest mortgage financier in the U.S., said Friday that its net income in the fourth quarter of 2020 checked in at $4.6 billion – up 8% from the third quarter. The government-sponsored entity’s total net income for the full year was $11.8 billion, and executives on Friday’s earnings call spoke enthusiastically about an eventual exit from forbearance.

However, that nearly $12 billion in net income is down 16% year over year due to a shift from $3.5 billion of credit related income in 2019 to nearly $900 million in credit related expenses in 2020. Regardless, Fannie Mae’s full year net revenues increased 16% to $25.3 billion thanks to record acquisition volumes.

For single-family, those acquisitions more than doubled to nearly $1.4 trillion, the highest level on record, of which refi volume made up $948 billion, the highest level since 2003.

According to a release, Fannie Mae’s guaranteed book also grew by over 8%.

“A decade plus of work to strengthen our risk management was evident in 2020’s financial results and health and the resiliency of America’s housing system, in the face of the pandemic stands in stark contrast to 2008 when housing was a key driver of the financial crisis,” said Celeste Brown, Fannie Mae’s chief financial officer, in a Friday earnings call.

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Brown attributed a great deal of Fannie’s capital growth to the amendments made to the senior preferred stock purchase agreement by the Federal Housing Finance Agency and the U.S. Department of the Treasury that would allow Fannie and Freddie Mac to retain more of their earnings.

The new agreement allows for an aggregate of about $283 billion in GSE capital retention, a move the GSEs applauded and one that Fannie Mae CEO Hugh Frater said was a significant milestone.

According to Brown, this amendment was critical for the GSEs to build their capital and achieve adequate capitalization under the new framework.

“This is essential, as building substantial GSE equity and capital remains a key unfinished aspect of our transformation under conservatorship. Additionally, the amendment formerly creates a foundation for exiting conservatorship,” Brown said.

While Fannie’s net worth at year end was $25.3 billion, the Enterprise estimated total capital requirement under the new rule would have been approximately $185 billion, including $135 billion in common equity tier one capital.

Looking forward Fannie Mae expects the market to continue to boom in 2021 – averaging $3.9 trillion in originations compared to the $4.4 trillion last year. However, the GSE said there is still much uncertainty as new COVID variants appear, and it is difficult to forecast the success of the vaccine rollout and the effectiveness of fiscal intervention in addressing economic strains relating to the pandemic.

Brown also revealed the Fannie Mae has adopted hedge accounting, which it said will reduce reported earnings volatility related to interest rate exposure, although it will continue to have exposure to spreads.

“I firmly believe that a responsible exit from conservatorship and the recapitalization of Fannie Mae is the best way to support our mission to serve America’s housing needs for future generations, protecting the taxpayer and creating a substantial layer of loss absorbing capital,” said Fannie Mae CEO Hugh Frater.

“We continue to believe that a Fannie Mae that is reformed, well regulated, capitalized and out of conservatorship, thus serve the needs and interests of our nation’s housing markets and our housing mission,” Frater said.

Freddie Mac noted a similar trajectory in the fourth quarter. In total, the company’s net income at the end of 2020 was $7.3 billion, a 2% increase from 2019. Its net worth increased to $16.4 billion, from $9.1 billion at December 31, 2019.

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