This quarterly report provides an overview of key aspects of the financial condition of Fannie Mae and Freddie Mac during conservatorship.
Executive Summary
Mortgage Markets and the Enterprises’ Market Presence
Primary mortgage market activity, measured by the volume of mortgages originated, declined by 13 percent in 2010 compared to 2009 driven by fewer home purchases and mortgage refinances. Refinance activity increased in the fourth quarter as mortgage rates remained near historic lows. The Enterprises continued to purchase or guarantee the bulk of mortgages originated, accounting for 70 percent of single-family mortgages securitized in 2010.
Credit Quality of New Single-Family Business
The quality of new business remained high in the fourth quarter and throughout the year. The average FICO credit score of new single-family business during 2010 remained high at greater than 750. Purchases of non-traditional mortgages remained very low.
Capital
Combined Treasury support as a result of financial performance in 2010 declined to $28.0 billion from $66.1 billion in 2009. The Single-Family Credit Guarantee segment continues to drive losses as credit-related expenses remain high. Investments segment results were positive in 2010, partially offsetting Single-Family Credit Guarantee segment performance. As the Investments segment generates positive results, the Single-Family Credit Guarantee segment accounts for a growing proportion of total cumulative charges against capital.
The Single-Family Credit Guarantee segment accounts for $181 billion, or 78 percent of combined charges against capital of $232 billion since the end of 2007.
Single-Family Credit Guarantee Segment Results
Credit-related expenses continue to drive segment financial results; however, loan loss reserves increased at a slower pace in 2010, reducing credit-related expenses relative to 2009. Slower inflows of seriously delinquent loans in 2010 contributed to more gradual increases in loss reserves compared to the prior year. Loss mitigation activity contributed to fewer inflows of seriously delinquent loans.
Investments and Capital Markets Segment Results
The financial performance of the Investments and Capital Markets segment improved during 2010 from a number of factors. Funding costs remained low as a result of the interest rate environment and pricing of private-label securities and commercial mortgage-backed securities improved.
Loss Mitigation Activity
Loss mitigation workouts increased substantially in 2010. Completed loan modifications tripled compared to a year ago. Repayment plans, forbearance plans and short sales also increased significantly year over year.
Projections of Financial Performance
FHFA published initial projections of the Enterprises’ financial performance in October 2010. In the October 2010 projections, combined projected Treasury draws for the Enterprises for the second half of 2010 ranged from $24 billion to $48 billion. The actual combined Treasury draw for the second half of 2010 was $6 billion.
Actual Treasury draws for the second half of 2010 were lower than projected because non-performing loans and mortgage defaults were lower than projected in the second half of 2010. Fewer non-performing loans and mortgage defaults resulted in higher revenue and lower credit-related expenses than projected, increasing net income and lowering Treasury draws compared to the projections.