Fannie Mae has released their Q2 earnings report.  The government sponsored enterprise (GSE) announced a shortfall of $1.2 billion, in the second quarter. a vast improvement over the $11.5 billion lost in the first quarter of the year and $20.4 billion in the second quarter of 2009.  The Q2 losses amount to .55 per share compared to $2.29 per share in the previous period and $2.67 per share a year earlier.

Based on the figures, the Acting Director of the Federal Housing Finance Agency, conservator of Fannie Mae, requested an additional $1.5 billion from the U.S. Treasury under the terms of the preferred stock purchase agreement between the two entities.  The funds were requested to eliminate the company's net worth deficit as of June 30.  Last quarter FHFA received $8.4 billion to cure the net worth deficit that existed at the end of March.  This quarter's contribution by Treasury will bring the total investment by taxpayers in Fannie Mae to $86.1 billion.

Fannie reports that those loans in its portfolio written in 2009 and 2010 continue to perform solidly and its credit-related expenses overall decreased by more than $7 billion.  These recent vintages, the company says, have the lowest early serious delinquency rates of any loans the company has acquired in the last 10 years due to the tightened underwriting standards that the company began to introduce in 2008 and its sharply reduced acquisition of higher risk loans. 

Almost all of the company's realized credit losses in the past two years have been attributable to single-family loans it acquired from 2005 to 2008; a group of loans that continues to be problematic.  Fannie recognizes it probably has not yet realized all of the credit losses from these loans, but states it is sure it has provided sufficient reserves for most future losses.

The company had $4.5 billion in net revenues for the quarter compared to 3.0 billion in Q1, a 49 percent increase.  This was due primarily to an increase in net interest income which grew from 2.8 billion in the first quarter to 4.2 billion.  The increase was due almost entirely to the purchase during the quarter of the majority of loans that were four or more months delinquent from single-family mortgage backed security (MBS) trusts.  The cost of holding these loans in Fannie's own portfolio is less than advancing delinquent payments to holders of the MBS securities.  The company purchased approximately 858,000 loans with an unpaid principal balance of $170 billion from single-family MBS trusts during the first half of the year; 570,000 of these loans with a value of $114 billion were purchased in the second quarter.  Interest income that the company did not recognize for nonaccrual mortgage loans was $2.2 billion, compared with $2.7 billion in the first quarter of 2010.

Credit related expenses, which are the total provision for credit losses plus foreclosed property expense, dropped from $11.9 billion in the first quarter to $3.9 billion reflecting a decrease in the rate of seriously delinquent loans to 4.99 percent from 5.47 percent, and a decrease in average loss severities.  The company also noted that this was also partially due to an update to the company's loan-loss allowance model to use mark-to-market loans-to-value (LTV) ratios rather than LTV ratios at origination in its severity calculations.  This resulted in a change in estimate and a decrease in loan loss allowances of about $1.6 billion.  These factors were partially offset by an out-of-period adjustment of $1.1 billion related to an additional provision for losses on pre-foreclosure property taxes and insurance receivables.  

Credit losses, including net charge-offs plus foreclosed property expenses increased to $7.0 billion to $5.1 billion due to increased defaults and number of properties in the owned-property inventory.

Fannie Mae acquired 68,838 single-family properties as owned real estate during the quarter, up from 61,929 in the first quarter.  At the end of the quarter it had a total of 129,310 properties in its inventory compared to 109,989 on March 31.  Along with the increase in numbers of properties came an increase in the numbers that were unmarketable; 36 percent because they are still within the statutory redemption period, others because they were still occupied, or being repaired.  Despite its workout initiatives, the company expects foreclosures to continue to increase through the remainder of the year because of a continuing weak economy.

The company's Single-Family Credit Guarantee book of business was $2.87 trillion compared with $2.88 trillion during the first quarter; fee income in each of the two quarters was $1.8 billion.  This portion of the business lost $5.1 billion in the second quarter due to credit-related losses, a substantial improvement over the $12.6 billion lost in the first quarter.

The Housing and Community Development multifamily guaranty book of business was unchanged from the first quarter at $186.1 billion from which the company earned $119 million in the second quarter compared to $99 million in Quarter One. 

Capital Market earnings were $4.4 billion compared to $3.1 billion; the net mortgage investment portfolio balance was $817.8 billion compared to $764.8 billion.  Capital Market earnings for Quarter Two were $4.4 billion compared to $2.1 billion in the earlier period.

Based on preliminary numbers, Fannie Mae estimates that home prices improved nationally by 2.2 percent in the second quarter but expects further declines the rest of this year and into 2011 before prices stabilize.  Home values have declined 16.9 percent since the peak was reached in the third quarter of 2006.

Other quarterly performance data contained in the report (Q1 data in parens where provided):

• Purchased or guaranteed $424 billion in loans including the $170 billion in delinquent loans purchased from MBS trusts.
• Provided $1.2 trillion in liquidity including purchasing 205 billion in delinquent loans from the MBS Trusts; financing 4,151,000 conventional single family mortgages and 487,000 multi-family mortgages.
• Issued 39.1 percent of all single family MBS (40.7 percent.)
• Completed home retention workouts for over 132,000 loans with principal balance of $27.0 billion (26 percent increase over number of workouts in Q.1)
• Loan modifications including permanent HAMP modifications, 121,696 (93,756).
• Repayment plans/forbearances, 8716 (8,682)
• Pre-foreclosure sales and deeds-in-lieu of foreclosure, 21,515 (17,326.)
• Guaranteed 354,000 refinances.