Fannie Mae joined Freddie Mac this morning in declaring an increased second quarter profit and announcing it would not request a draw from the Department of the Treasury.  Instead, the government sponsored enterprises (GSE) will pay a $2.9 billion dividend to the Department on the senior preferred stock it owns.

Fannie Mae reported income of $5.11 billion in the second quarter, nearly twice the $2.72 billion income reported in the first quarter.  In the second quarter of 2011 there was a loss of $2.99 billion.  The company has now reported $7.8 billion in net income in thus far in fiscal 2012 compared to a loss of $9.4 billion at the same point in 2011.  Fannie Mae said the improvement in its financial results were nearly all due to credit-related income resulting primarily from an improvement in house prices, improved sales prices on its owned real estate (REO), and a decline in the serious single-family delinquency rate.

At the end of the second quarter the company had net worth of $2.8 billion reflecting total comprehensive income of $5.4 billion partially offset by the dividend payment to Treasury.  The total liquidation preference of the Department's senior preferred stock is $117.1 billion which requires an annualized dividend payment of $11.7 billion.  Since the original infusion of money from the Treasury, Fannie Mae has paid $25.6 billion in cash dividends on the senior stock representing 22 percent of the amount borrowed from Treasury.

The company's total loss reserves decreased to $68.0 billion as of the end of the quarter from $76.9 billion as of December 31, 2011.  The company expects the trends of stabilizing home prices and declining serious delinquency rates will continue although rates are expected to decline at a slower rate than in previous quarters.  The company feels that loss reserves peaked at $76.9 billion and will not increase above that number in the foreseeable future.  It also projects lower credit-related expenses this year than last year.

The company's single family serious delinquency rate has declined each quarter since Q1 2010 and was at 3.53 percent at the end of June compared to 5.47 percent on March 31, 2010.  This decrease is the result of home retention and foreclosure prevention programs, completed foreclosures, and the company's acquisition of loans with stronger credit profiles.  These more recent and higher credit quality loans now represent 59 percent of the company's single family guarantee book of business.

To reduce the credit loses on the legacy portion of its book of business the company has been focusing on several strategies including loan modifications.  It completed more than 35,000 modifications during the second quarter and has completed more than 797,000 since the beginning of 2009.  During the second quarter the company also completed 24,013 short sale and deeds-in-lieu transactions and implemented 5,894 repayment plans or forbearances.

Fannie Mae sharply increased the number of loans it acquired under the Home Affordable Refinancing Program (HARP 2.0) during the quarter.  These approximately 128,000 HARP 2.0 loans constituted 15 percent of the single-family acquisitions during the quarter by unpaid principal balance compared to 10 percent in the first quarter. 

If interest rates remain low Fannie Mae expects that it will continue to acquire a high volume of HARP 2.0 loans, particularly those with loan-to-value (LTV) ratios over 125 percent.  HARP and Refi Plus loans represent refinancing of loans that are already in the company's book of business and hence the credit risk of these new loans replaces the risk represented by the old loans.  They have higher serious delinquency rates and may not perform as well as the other loans acquired since the beginning of 2009, however the company expects that, because of the lower payment and the fixed rate, they will perform better than the loans they replace.

The GSE acquired 43,783 single-family REO properties in the second quarter compared to 47,700 in the first quarter and disposed of 48,674 properties compared to 52,071.   As of June 31 the total inventory of REO was 109,266 compared to 114,157 on March 31.  The carrying value of the REO was $9.4 billion.