As expected, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s second quarter earnings are down sharply from last quarter as legal settlements related to the sub-prime crisis have mostly been paid up, but net interest income was up for the quarter and credit quality continued to improve.

Fannie Mae will pay $3.7 billion to Treasury in dividends

Net interest income increased from $4.7 billion in 1Q14 to $4.9 billion in 2Q14, while fee and other income dropped from $4.4 billion to $383 million in 2Q14. Net income fell from $5.3 billion to $3.7 billion in the second quarter, all of which will be paid to Treasury as dividends bringing total payments to $130.5 billion compared to $116.1 billion in draw requests.

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In line with Federal Housing Finance Agency director Mel Watt’s decision that Fannie Mae would ‘maintain’ credit availability the amount of liquidity that the agency made available to the market was steady quarter-on-quarter after a period of steady decline.

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Fannie Mae income by business segment

Net income from Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s single family business improved from $2.1 billion in 1Q14 to $2.7 billion last quarter, as guaranty fee income was flat but credit-related income increased. Fannie Mae also reported that 79% of its single family book business is now made up of loans guaranteed in 2009 or later; of the new business 26% are new mortgages and 74% are refinanced loans. The shift to newer loans with better underwriting standards also means that Fannie Mae’s total loan loss reserves continues to fall, now down to $42 billion compared to $53 billion in 2Q13 and $45 billion in 1Q14. Single-family delinquency has been falling for nearly four straight years now.

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Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA)’s multi-family segment grew slightly from $330 million net income to in 1Q14 to $376 million in 2Q14, largely because the segment had lower costs. In Fannie Mae’s capital markets segment net interest income grew from $1.8 billion in 1Q14 to $1.9 billion and net investment gains grew from $1.3 billion to $1.6 billion over the same period, but these gains were overshadowed by the $4 billion drop in Other income, again representing the fact that financial crisis legal settlements have mostly wrapped up.

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