Healthy mortgage volumes and share buy-backs drove Fannie Mae's and Freddie Mac's double-digit earnings growth in 1996.
And analysts say neither agency shows any sign of slowing down over the next few years. The two already dominate the home loan market - buying or securitizing 40% of all loans - and are expected to continue to grab share from depository institutions.
"I don't think the market share game is over," said Bruce Harting of Lehman Brothers.
Over the next two years, Mr. Harting said, he expects Fannie Mae to increase the mortgages it holds and securitizes by 8%, and Freddie Mac to achieve a 9% increase.
Meanwhile, last year's low and stable interest rates yielded a rich supply of the fixed-rate mortgages that Fannie and Freddie favor for their investment portfolios. At both mortgage agencies, interest income on these investments is the biggest contributor to earnings.
Fannie Mae's earnings of $2.73 billion were 14.9% above the 1995 level, excluding a special $350 million contribution by Fannie Mae to its foundation in 1995. Earnings per share of $2.48 were 15.3% higher than in 1995.
Freddie Mac's earnings of $1.24 billion were 14% higher than in 1995. Earnings per share of $1.65, after a 4-for-1 stock split, represented a 16% increase.
Fannie Mae, formally the Federal National Mortgage Association, expanded its mortgage portfolio by 13.3% to $286.3 billion on Dec. 31. Net interest income on mortgages and other investments increased 17.9% to $3.59 billion. The net interest margin on investments increased 2 basis points to an annual average of 118 basis points.
Freddie Mac - the Federal Home Loan Mortgage Corp. - increased its mortgage holdings by 28% to $137.5 billion.
Net interest income on earning assets was $1.54 billion, a gain of 18.5% over 1995. The net interest yield fell 10 basis points to 1.04%, as Freddie Mac refinanced low-cost, intermediate-term debt with longer term, callable debt with short call periods. The new debt is intended to lower Freddie Mac's interest rate risk.
Both agencies also increased their mortgage-backed securities. Fannie Mae's securities grew to $534.6 billion, not including those held by Fannie in its own portfolio. That was up 8.1% from 1995.
Guaranty fees were $1.196 billion in 1996, an increase of 10% from 1995.
At Freddie Mac, management and guaranty fees totaled 1.25 billion, up 5% from 1995. Guaranty fees dropped by four-tenths of a basis point, but the securities guaranteed increased 7.6% to $554.26 billion.
Credit-related expenses rose at both agencies in 1996. At Fannie Mae, those expenses were $408.7 million, 22% higher than in 1995.
At Freddie Mac, credit-related expenses jumped 12% year-over-year to $608 million.
But analysts expect that falling credit costs will further bolster earnings, as the California economy finally picks up.
Both agencies are predicting that their credit costs will fall by the year 2000.
Credit costs are expected to fall from the current 6 basis points to 4 at Fannie Mae, and from 10 to 5 at Freddie Mac.
