The Federal Housing Finance Agency in its 2013 report to Congress points out Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s record net income in 2013 are greater than at any prior time in their respective histories and these record income were driven largely by certain unique and very large benefits to income.
The FHFA doesn’t anticipate such unique benefits to be repeated in future years and hence the 2013 levels of net income won’t be approached anytime in the foreseeable future.
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DTA and ALLL benefits
The report points out that both the Enterprises have historically reported large net deferred tax assets (DTAs) on their balance sheets. The DTAs are recognized based on the anticipated future tax consequences of existing temporary differences between the financial reporting and the tax-reporting basis of assets and liabilities.
The report highlights that the applicable accounting standard requires entities to reduce DTAs using a valuation allowance (VA) if, based on all available evidence, it is more likely than not that some or all of the DTAs will not be realized.
The report points out that during 2013, both Enterprises concluded that the weight of all available evidence, both positive and negative, indicated their VAs were no longer necessary. Moreover, enterprise management considered updated estimates of future taxable income, which indicated that it was more likely than not that the DTA would be realized in the future. The VA release amounted to over half of 2013 net income for both Enterprises.
Turning its focus on allowance for loan and lease losses (ALLL), the report notes while Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s ALLL peaked at the end of 2010 Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s ALLL peaked at the end of 2011. However, in the last two years, the converse has occurred as the factors that characterized the early stages of the credit crisis have changed dramatically as is evidenced by the improving economy and strategies to resolve delinquent loans, like FHFA’s servicing alignment initiative, are taking hold.
Fannie Mae, Freddie Mac: Improved credit quality
The FHFA report notes the credit quality of the Enterprises’ new single-family guarantees in 2013 remained high by historical comparison. The following table captures Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s housing goals and performance for 2012-13:
The following table sets forth Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC)’s goals and performance for 2012-13:
The report also points out that higher-risk mortgages, such as no-income documentation or interest-only mortgages have largely been eliminated from the Enterprises’ new guarantees. Moreover, the average loan-to-value ratio of mortgages acquired in 2013 was similar to 2012 at about 76%, partly reflecting continued refinance transactions under the Home Affordable Refinance Program (HARP) and an increased percentage of purchase money mortgages.
The FHFA report also highlights that in 2013 it issued 30 rules, proposed rules, final rules, and policy guidance documents. Some of them are captured in the following tables:
Fannie Mae, Freddie Mac 2013 One-Time Event via FHFA