Fannie Mae and Freddie Mac are strong and profitable concerns-and getting more so, according to the latest report card from the Office of Federal Housing Enterprise Oversight.
The regulator is charged with monitoring the enterprises' fiscal safety. In its 1996 annual report, the oversight office concluded that both enterprises did a good job managing the risks of their business. The report was sent to Congress this week.
It credited Fannie and Freddie's fiscal strength to a number of factors.
For example, it said, both benefited from last year's strong fixed-rate market and captured bigger shares of the conventional market. Their purchases increased by 30% while the conventional market grew 20%, the report said.
The regulator said that Fannie had cut back substantially on its credit risk, noting that mortgages with loan-to-value ratios exceeding 90% made up 16% of Fannie's purchases, down from 19% in 1995.
As in previous years, the report noted, income growth at both enterprises was fueled by increases in the mortgage portfolios of each.
At Freddie, net interest income grew 22%, to $1.71 billion-accounting for 94% of the enterprise's revenue growth.
At Fannie, net interest income grew 18%, to $3.59 billion, accounting for 81% of its revenue growth.
The report noted that the net interest margin fell substantially at Freddie Mac-from 1.23% in 1995 to 1.15% in 1996. The net interest margin rose 1 basis point, to 1.18%, at Fannie, which refinanced a big chunk of high-yield debt last year.
Fannie and Freddie bought more than one-quarter of the mortgage-backed securities they issued. Fannie bought $45 billion of its own issues; Freddie, $32 billion of its.
Guarantee fee income rose 10% at Fannie, the report said, but fell at Freddie. Fannie Mae earned an average guarantee fee of 0.224%; Freddie averaged 0.234%.
Credit-related losses grew at Fannie, mainly due to higher loan volume, the report said. Measured as a percentage of the mortgage portfolio plus mortgage-backed securities outstanding, credit losses at Fannie rose to 5.1 basis points from 4.8 basis points.
At Freddie, losses decreased slightly, to 10.4 basis points.
Freddie's higher losses were attributed to its high concentration of California loans, whose portfolio share it has decreased in the past two years, from 25.5% to 21.8%.
Real estate mortgage investment conduit, or Remic, issuance more than doubled at Freddie Mac, to $34 billion, and more than tripled at Fannie Mae, to $27 billion, according to the report.
Still, new issuance could not offset liquidations of the underlying loans, and Remics outstanding fell for the third year in a row, to a combined total of $521 billion.
The regulator pointed to three trends that are likely to affect the enterprises.
First, it expects more conventional loans will be priced according to their riskiness, as the use of credit scoring spreads. The least risky borrowers are likely to be affected soonest, as investors demand less documentation to support loan applications from these borrowers and administrative costs on such mortgages fall, the report said.
A second byproduct of credit scoring, the regulator said, would be the blurring of the subprime and conforming markets.
With credit scores, about one-third of loans previously classified as subprime should be reclassified as investment-grade.
