Fannie Mae, the government-sponsored enterprise that backs the majority of conventional mortgages, is not immune to the sharp decline in mortgage refinances.
The enterprise reported $7.5 billion in first quarter revenue, a $700 million jump from 2021. But net income income was down 12% from nearly $5 billion first quarter 2021, to $4.4 billion this quarter. Fannie Mae’s net worth is now $51.8 billion, up from $47.4 billion at the end of last year.
Fannie Mae’s net income decrease was mainly due to the expense of managing credit risk on mortgage loans. That’s because as fixed-term mortgage rates rise, borrowers are less likely to prepay, or refinance, their mortgages. And, as mortgage terms lengthen, so too does the cost of possible loan impairment or credit loss.
Provisions for those eventualities amounted to a reduction of $1 billion from the $765 million in credit-related income generated in the first quarter of 2021. Fannie Mae reported a $240 million loss in credit-related income for the first three months of 2022.
These credit-related expenses were at least partly offset by rising home prices.
Continued home price growth, which Fannie Mae predicts will decelerate from 19% year-over-year in 2021, to around 11% in 2022, increases borrowers equity. That increase can reduce the risk of loan impairment — since borrowers with more equity are less likely to default — and lead to new cash-out refis for even higher principal amounts. Increasing home prices also adds to the amount Fannie Mae can recover from the underlying property in a foreclosure sale.
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Still, Fannie Mae projects refinances will be a shadow of 2021 levels. While it forecasts total originations will decrease from $4.48 trillion in 2021 to $2.82 trillion in 2022, refinances will decrease from $2.61 trillion in 2021 to just $889 billion this year, a 193% decrease.
The share of refinance activity in Fannie Mae’s portfolio has already declined substantially. The company acquired $135 billion worth of loans stemming from the refinancing of single-family mortgages in the first quarter of 2022, less than half of the $301 billion in quarter one 2021.
Since the loan to value ratios for home purchase loans are typically higher than they are for refinances, the percentage of single-family loan acquisitions with ratios over 80% grew to nearly a quarter in the first three months of the year, from 19% in the first quarter of 2021.
The decline in refinance share also brought the average credit score down from 2021, when the average credit score for a Fannie Mae borrower was 761. The average credit score in Fannie Mae’s portfolio is now 748.
Fannie Mae also pointed out in its earnings report that new seller servicer requirements, which its conservator the Federal Housing Finance Agency re-proposed in February, would increase liquidity requirements for its non-depository sellers and servicers.
Trade groups representing smaller non-depositories said the liquidity requirements for non-depositories would lead to fewer consumer choices and less competition. A report from the Urban Institute called the liquidity requirements “punitive.”
A large portion of its seriously delinquent loans, Fannie Mae said, are serviced by non-depositories, and would be impacted by the new rules.
One percent of Fannie Mae’s single-family portfolio is seriously delinquent. More than two-thirds of those loans have been delinquent for more than six months, and 12% have been delinquent for more than two years.
Although not mentioned in Fannie Mae’s quarterly report, the company is dealing with a continued exodus of high level officials. In April, Fannie Mae’s CEO, Hugh Frater, and Sheila Bair, the chair of its board, both announced they would resign from the mortgage finance behemoth May 1, shortly after Fannie Mae announced the resignation of COO Kimberly Johnson.
Fannie Mae now has its president, David Benson, as interim CEO, and has said it is conducting a nationwide search for a permanent enterprise leader. Michael Heid, a board member since 2016 and before that an executive at Wells Fargo for 20 years, is presently board chairperson.
