Congressional members continue to call for the dismantling of Fannie Mae and Freddie Mac (Enterprises) while the two mortgage giants continue to post record profits. Combined, the two “Enterprises” posted second quarter earnings of $15.1 billion according to a new quarterly report launched today.
The second quarter profits are the sixth consecutive quarter in which both Enterprises have posted positive net income. This net income is significantly influenced by rising house prices. Home prices year-to-date are up 4.3 percent according to the FHFA (Federal Housing Finance Agency) House Price Index. This the seventh consecutive quarterly price increase in the “purchase-only, seasonally adjusted” index. The FHFA is the conservator of the Enterprises.
This increase in profit comes also at a time that interest rates are on a rise. Since the low point of 3.35 percent in December, rates have continued up to over 4 percent today for the benchmark 30 year fixed rate. The increase in interest rates are credited with adding to the net income through hedging interest rate risk through “pay-fixed derivatives.”
Reserves against loss are also continuing to fall for the Enterprises as the quality of the existing portfolio continues to improve as the number of delinquent loans acquired prior to 2009 declines and those since have stronger credit characteristics. Additionally, rising home prices in almost all parts of the country are lowering expected defaults. These factors resulted in a $9.3 billion decrease in the Enterprises loan loss reserve. This is the third consecutive quarter that both Enterprises reported benefit from credit losses.
Loans purchased after the Enterprises went into conservatorship now account for 71 percent of the Enterprises single family portfolio and the delinquency rate for this book of business is below one percent. Eighteen percent of the portfolio was made between 2005 and 2008 and continues to have serious delinquency rates.
This change has come at a cost for those with less than stellar credit scores. The average Fannie Mae FICO credit score for 2013 is now 756 while the average Freddie Mac score is 751. FICO scores range from 350 to 850 with 680 being the generally considered minimum for a Fannie Mae or Freddie Mac loan.
About the author: Fred Chamberlin was a senior loan officer with Guild Mortgage Company in Oak Harbor. He was in the mortgage origination business for over 20 years and in the lending business for over 30 and authors a number of mortgage related blogs.