WASHINGTON - Despite a big rise in the popularity of fixed-rate mortgages, earnings at Fannie Mae and Freddie Mac grew only moderately in the second quarter. But analysts believe stronger performance may lie just ahead.
Fannie Mae reported earnings of $572.6 million, a 9% gain from a year earlier but just 1% above earnings in the first quarter.
Freddie Mac earned $264 million, a gain of 6% year to year and a 2% rise from the preceding quarter.
Fannie Mae, formally the Federal National Mortgage Association, and Freddie Mac - the Federal Home Loan Mortgage Corp. - both excel when fixed- rate mortgages are popular. Those loans gained considerable ground on adjustable-rate models this spring as interest rates fell.
But results at the agencies typically lag behind the market by a couple of months - about the time it takes for loans made by lenders to end up in the securities pools or portfolios of the agencies.
Thomas O'Donnell, an analyst at Smith Barney, said the second half of this year and 1996 promise to yield strong earnings for both agencies.
Mr. O'Donnell voiced some concern, however, that continued low rates and a rising tide of prepayments could lead to negative float income at Freddie Mac. That could cut into interest income from Freddie's growing portfolio - which has made analysts so bullish on the company.
Indeed, Freddie Mac expanded its mortgage portfolio at a record pace in the second quarter, according to Leland C. Brendsel, chairman.
The portfolio grew $8 billion from the previous quarter to $85.5 billion, and the agency said it expects to add another $2.3 billion of purchases in the near future.
During the refinancing boom, negative float income dampened earnings at Freddie Mac.
Unlike Fannie Mae, Freddie Mac holds prepaying mortgages for up to 68 days before turning the final principal and interest payments over to the investor. During this time, it invests the money in short-term investments that can earn less than the prepaying mortgage, resulting in the negative float.
At Fannie Mae the most significant development in the quarter was the continuing increase in the volume of mortgages sold to Fannie Mae, and the resulting acceleration in loan portfolio growth, said analyst Jonathan E. Gray of Sanford Bernstein & Co.
Fannie Mae's portfolio grew at an annualized rate of 16% in the second quarter, up from 4% in the preceding quarter. Loan growth surged in June to a 24% pace, which may hold over the next several months, according to Mr. Gray.
Besides the loan growth, Fannie Mae's earnings benefited from a $23.4 million reduction in federal income tax expense, according to Lawrence M. Small, Fannie Mae's president and chief operating officer.
This was partially offset by a $12.6 million decline in miscellaneous income and an $8.0 million pretax loss from the repurchase of debt.
