WASHINGTON – Fannie Mae’s investment portfolio – once the source of a bulk of its revenues – continued its rapid decline in the first quarter, but executives said they are comfortable focusing on other areas for growth going forward.
The government-sponsored enterprise’s holdings of mortgage-backed securities and other mortgage-income producing assets fell to below $200 billion.
"Today we have wound down the investment portfolio from a historic high of $900 billion to less than $200 billion with further reductions underway," Timothy Mayopoulos, the GSE’s chief executive, said during an earnings conference call Thursday.
While profitable, reliance on these investments made the company's earnings volatile, subject to the ups and down of interest rates and hedging strategies. Going forward, Fannie will be relying more on loan guarantee fee income from its single-family and multifamily businesses.
"It is a stable source of revenue and much less subject to interest rate and market volatility," Mayopoulos told reporters.
Fannie generated $3.2 billion in single-family guarantee income in the first quarter of 2016 and fourth quarter of 2015. Multifamily guarantee income totaled $333 million in both quarters.
Overall, Fannie's single-family business posted net income of $2.4 billion in the first quarter, compared with a $464 million loss by its capital markets business, which reflects the GSE's investment portfolio results.
The Federal Housing Finance Agency hiked Fannie and Freddie Mac's single-family guarantee fees in 2012 and now a large portion of its single-family portfolios are benefiting from the higher fees.
"Approximately 85% of our loans are 15- and 30-year fixed-rate loans," Mayopoulos said. "These mortgages remain the loan of choice of the vast majority of homebuyers."
Overall, Fannie Mae posted $1.1 billion in net income for the first quarter, compared to net income of $1.9 billion in the first quarter of 2015. Despite a shift in revenue sources, Mayopoulos said he expects Fannie will "remain profitable on an annual basis for the foreseeable future."
Freddie Mac issued its earnings on Tuesday and reported a $200 million loss. This loss raised concerns that the reduction in the investment portfolios and the new emphasis on risk sharing transactions will reduce the GSEs' earnings potential. In addition, the both GSEs are in conservatorships and undercapitalized for their size.
Fannie has a net worth of $2.1 billion, compared to Freddie's $1 billion.
When asked about Fannie's capital cushion, Mayopoulos noted that the GSEs have a line of credit with the U.S. Treasury.
"We try to keep credit standards high so as to minimize losses. We have been aggressive in addressing loss mitigation when loans go delinquent," he added.
The serious delinquency rate (90 days or more past due) on Fannie loans has been declining since 2010. Its $2.8 trillion single-family loan guarantee portfolio had a 1.44% serious delinquency rate as of March 31 and 55% of its delinquent loans were originated in 2005 through 2008.
During the conference call, Mayopoulos also stressed Fannie's commitment to credit risk transfers.
"We are moving from being a company that stores credit risk to being one that also matches credit risk by intelligently distributing it other market participants. We do this through capital market transactions, reinsurance transactions and other types of transactions," he said.
Over the past two years, Fannie has sold a portion of the credit risk on $590 billion of single-family loans, which represents 18% of its single-family guarantee portfolio. Those investors are taking a portion of the first-loss position and receive a share of the guarantee fees.
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Corrected May 5, 2016 at 3:31PM: guarantee