The Federal Housing Finance Agency in its 2012 report to Congress tagged Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) as ‘significant concerns’ in the earnings category, an upgrade from a ‘critical concerns’ rating in 2011.
According to FHFA’s report, the conservatorships of Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC), which began in September 2008, combined with U.S. Treasury financial support and management actions, have stabilized the Government Sponsored Enterprises. However they face key challenges such as ongoing stress in the nation’s housing markets, a challenging economic environment, and the need to implement the FHFA Strategic Plan for Enterprise Conservatorships.
FHFA rated Fannie Mae (OTCBB:FNMA) and Freddie Mac (OTCBB:FMCC) as ‘critical concerns’, under a composite rating category. The rating remained unchanged from 2011.
FHFA finds the Government Sponsored Enterprises generated positive annual income in 2012, a first since 2006, with Fannie Mae (OTCBB:FNMA) posting over $17 billion in earnings and Freddie Mac Freddie Mac (OTCBB:FMCC) reporting net income of $11 billion in 2012.
However, the GSEs continue to face credit risk, which remained unchanged from 2011.
Fannie Mae’s Performance
FHFA feels Fannie Mae (OTCBB:FNMA) exhibits critical financial weaknesses as evidenced by its lack of capital, the quality of legacy assets, level and extent of internal control breakdowns, uncertainty over the sustainability of its recent financial performance, and the nature of conservatorship status. Further, FHFA notes that due to its contractual agreement, Fannie Mae (OTCBB:FNMA) can’t use earnings to augment capital. U.S. Treasury draws are currently Fannie Mae (OTCBB:FNMA)’s only source of capital.
FHFA in its 2012 report observes recent improvement in Fannie Mae (OTCBB:FNMA)’s financial performance is driven by favorable trends in housing prices, the strong book of business, charged guarantee fees and actions taken to reduce credit losses and improve profitability.
Fannie Mae (OTCBB:FNMA) continues to operate with an excessive amount of credit risk in the single-family portfolio. FHFA expressed concerns about the condition of key counter-parties and the effect of an accelerated wind-down of the retained portfolio.
The following table summarizes FHFA’s comparative ratings for Fannie Mac (OTCBB:FNMA) on various parameters:
Freddie Mac’s Performance
Commenting on the performance of Freddie Mac (OTCBB:FMCC), FHFA feels the Enterprise exhibits critical financial weaknesses as evidenced by its $72.3 billion draw from the U.S.Treasury and uncertain future prospects. The overall risk profile of Freddie Mac (OTCBB:FMCC) remains elevated as it faces continuous credit losses from the pre-2009 single-family mortgage portfolio, significant concerns over counter-party credit risk, besides uncertainty over its future state and related external events outside of management’s control.
The following table summarizes FHFA’s comparative ratings for Freddie Mac (OTCBB:FMCC) on various parameters:
On the performance of 12 Federal Home Loan Banks, FHFA observes for the third consecutive year, all the banks posted a profit, making 2012 the most profitable year since 2007.
As reported earlier, U.S. senators are giving final touches to a proposal to liquidate the state-owned mortgage giants, Federal National Mortgage Association (OTCBB:FNMA) (Fannie Mae) and Federal Home Loan Mortgage Corp (OTCBB:FMCC) (Freddie Mac), and substitute them with a government re-insurer of mortgage securities backed by private capital.