Fannie and Freddie are doing quite well for themselves, however, it seems to be at the expense of their borrowers. These borrowers are the product of the cleanest, most heavily documented, and thoroughly underwritten and appraised loans in history. Many in the industry are paying close attention to how credit is impacted by rates, fees, guidelines, compliance costs and consolidation in the industry - it will be a real estate case study. Last year showed an increase of 10 base points (on average), greater LLPA's on higher LTVs, and lower FICO loans. In 2013, roughly 40% of net interest income was from g-fees on loans in MBS - this was in increase from 30% in 2012, and 25% in 2011. It is seemingly safe to say that this trend will continue and in the future - the majority of income will come from g-fees.
Some may wonder why the US seems to be downplaying the profits of Fannie and Freddie. Michael Stegman, the Treasury advisor, warned of the recent returns "may significantly overstate the true financial condition" of the companies. It is important to note that some of the profits came from one-time tax reversals due to write-downs from 2008. Other profits came from releasing loan-loss reserves and one-time legal settlements. Also, their financial outlook has benefited from strong home-price appreciation and low-interest rates - both of which may level out in the near future.
The Obama administration made it quite clear that it does not support the idea of returning Fannie and Freddie to their "government-Sponsored" status - as entities that are neither fully private or fully public. This recent profit could remove the urgency for any overhaul, but also allow lawmakers to be more comfortable with less dramatic changes when an overall is discussed. There is an argument that there are more pressing issues that are proving to be ones that Congress can't agree on - so proposals this year are quite unlikely.
For more market news click here.
Comments (2)Subscribe to CommentsComment