WASHINGTON - Despite sharp drops in the volume of residential lending, Fannie Mae and Freddie Mac had record profits in 1994.
The two biggest investors in home loans made double-digit gains over their earnings in 1993.
"Both companies have been doing very well in a down market," said Thomas O'Donnell, an analyst at Smith Barney Inc., New York.
Fannie Mae, formally the Federal National Mortgage Association, said its earnings reached $2.13 billion, up 14% from the level in the industry's boom year of 1993. Freddie Mac, formally the Federal Home Loan Mortgage Corp., said its earnings were $983 million, up 25%.
The earnings growth is especially striking because it occurred in the face of rising interest rates, which led to a 35% drop in loan volume from 1993's $1 trillion level.
Another obstacle for Fannie and Freddie: By yearend, more than half the loans being originated carried adjustable rates.
By and large, banks and thrifts have held ARMs in their own portfolios, or sold them to other depository institutions, rather than to Fannie and Freddie.
Analysts said the government-backed Fannie Mae and Freddie Mac have countered by expanding their portfolios through selective purchases of their own mortgage-backed securities. Loans held in portfolio yield higher returns than the packaging of mortgage-backed securities. Income from the portfolios now accounts for the bulk of profits at the two agencies.
Fannie Mae said its average loan portfolio grew 16%, to $206 billion. Net interest income on assets held in portfolio was $2.82 billion. Lawrence C. Small, president, said the gain in portfolio income helped offset a decline in miscellaneous income and increases in expenses.
Freddie Mac said its average portfolio grew 21%, to $72 billion. Net interest income on portfolio assets was $1.1 billion.
Guarantee fee income, which the agencies earn through guaranteeing the credit quality of mortgages bundled into securities, was also up at both agencies.
At Fannie Mae, guarantee fee income rose 12.6%, to $1.08 billion. Freddie Mac's income from guarantee fees gained 10%, to reach $1.1 billion.
Miscellaneous income, which includes fees from transactions in mortgage investment conduits, was down at both agencies.
At Fannie Mae, miscellaneous income was down 44.3%, to $144.9 million; at Freddie Mac, 48%, to $66 million.
With loan volumes projected to shrink further, to $600 billion this year, both agencies are still expecting earnings to grow.
"Freddie Mac's strong 1994 earnings demonstrate how . . . effective risk management and sharp execution produce consistently superior performance, even when market conditions change drastically," said David Glenn, president, in a prepared statement.
Mr. O'Donnell of Smith Barney said he expected Fannie Mae to increase its earnings by double digits this year, and Freddie Mac to show more solid growth in the mid-teens.
"At the moment, Freddie has greater growth prospects," Mr. O'Donnell said, because it is growing from a smaller base. In addition, it has maintained tighter control over costs, he noted.
Administrative costs rose 5% at Freddie Mac in 1994, versus 18% at Fannie Mae, he said. Costs rose more steeply at Fannie Mae in part because the agency has initiated several affordable-housing programs.
He said he expects Fannie will keep tighter control over costs in 1995.