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
Mortgage originations in 2011 are on pace to be below 2010 levels as home purchase activity remains weak, despite low mortgage rates during 2011. More than half of all mortgage originations this year are due to refinance volume. The Enterprises continue to dominate the MBS issuance market accounting for 71 percent market share.
Credit Quality of New Single-Family Business
The quality of new business remained high year-to-date 3Q11, as evidenced by average FICO credit scores greater than 750. Both Enterprises have experienced a slight uptick in new business with LTVs greater than 90 percent. This is due primarily to activity related to Enterprise refinance programs (including the Home Affordable Refinance Program) that support improving the housing market.
Capital
Combined Treasury support as a result of poor financial performance in the third quarter of 2011 was $13.8 billion. The Single-Family Credit Guarantee segment continues to drive losses as credit-related expenses remain high. The Investments segment results were also weak in the third quarter of 2011, partly due to derivative losses arising from a significant decline in swap rates. The Single-Family Credit Guarantee segment and senior preferred dividends have been the main drivers of charges against capital since the end of 2007.
Single-Family Credit Guarantee Segment Results
Credit-related expenses continue to drive Single-Family Credit Guarantee segment financial results for the Enterprises. Enterprise combined revenue for this segment of $7 billion year-to-date was not enough to offset the $32 billion in credit-related expenses. Credit-related expenses continue to be driven by the provision for credit losses due to factors such as home price deterioration and an aging delinquent loan population.
Investments and Capital Markets Segment Results
The Investments and Capital Markets segment has been a positive contributor to capital year-to-date 2011. Funding costs remain low as a result of the interest rate environment contributing primarily to $16 billion in total revenue for this segment year-to-date. Revenue more than offset losses on derivatives and other expenses.
Loss Mitigation Activity
Since conservatorship, the Enterprises have completed nearly 2 million foreclosure prevention actions. More than one million of these actions have been permanent loan modifications and another 676,500 have been other forms of assistance that have allowed homeowners to retain homeownership. Approximately 269,700 of the actions have been short sales and deeds-in-lieu, which resulted in households leaving their homes but without going through the foreclosure process.
Projections of Financial Performance
The projected combined Treasury draws for the third quarter of 2011 ranged from $16 billion to $23 billion. This compares to an actual combined draw of approximately $13.8 billion. The primary driver of the difference between actual and projected performance was lower than projected credit-related expenses at Fannie Mae as a result of reduced provisioning for credit losses. A key driver of reduced provisioning for credit losses was lower delinquencies and higher expected prepayments due to the continued lower rate environment.