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
Refinance activity remained robust in the third quarter of 2012 as mortgage rates reached new record lows and Home Affordable Refinance Program (HARP) volume remained high driven by enhancements targeting deeply underwater borrowers. Seventy-two percent of all mortgage originations year-to-date through September 2012 were due to refinance volume. Combined Enterprise mortgage-backed securities (MBS) issuance share grew to 77 percent year–to-date through September 2012.
Credit Quality of New Single-Family Business
The quality of new business remained high in the first nine months of the year, as evidenced by average FICO credit scores above 750. Both Enterprises continue to experience an increase in new business with loan-to-value (LTV) ratios greater than 90 percent, which is directly related to increased activity under HARP.
Capital
For the second consecutive quarter, both Enterprises ended the quarter with positive net worth. The Single-Family Credit Guarantee segment generated moderate losses in the third quarter of 2012, as a result of relatively low provisions for credit losses. The Investments and Capital Markets segment results continued to be positive in the third quarter of 2012 driven by low funding costs as a result of the low interest rate environment.
Single-Family Credit Guarantee Segment Results
In the first nine months of 2012 both Enterprises incurred substantially lower credit-related expenses, primarily due to substantially lower provisions for credit losses. Lower provisions for credit losses were driven by improvement in national home prices and real estate owned (REO) disposition values, and the decrease in the seriously delinquent loan population.
Investments and Capital Markets Segment Results
The Investments and Capital Markets segment was a positive contributor to capital in the first nine months of the year, as both Enterprises continued to benefit from low funding costs as a result of the low interest rate environment.
Loss Mitigation Activity
Since conservatorship, the Enterprises have completed approximately 2.5 million foreclosure prevention actions. Half of these actions were permanent loan modifications.
Projections of Financial Performance
The projected combined Treasury draws for the third quarter of 2012 ranged from $1 billion to $5 billion. Both Enterprises ended the quarter with positive net worth, and as a result, neither Enterprise required a Treasury draw in the third quarter. The primary driver of the difference between actual and projected performance was lower than projected provisions for credit losses and lower than projected mark-to-market losses. Lower provisions for credit losses were mainly driven by improved portfolio quality reflected in lower serious delinquencies and lower LTV ratios, combined with higher REO disposition values. The lower than projected mark-to-market losses were driven by an actual increase in non-Agency securities prices in the third quarter of 2012 compared to the projected decrease in non-Agency securities prices.