Both Freddie Mac and Fannie Mae released third quarter financial results on Thursday. The government sponsored enterprises (GSEs) each reported that their recently completed quarters had been a profitable one, although not at their earlier record high levels, and that each will be paying substantial dividends to the U.S. Treasury.
Freddie Mac reported net income of $2.1 billion, the 12th consecutive quarter the company has posted positive earnings, compared to $1.4 billion in the second quarter of 2014. Comprehensive income was $2.8 billion, up from $1.9 billion in the previous quarter.
Fannie Mae said its net income in the third quarter of 2014 was $3.9 billion and comprehensive income was $4.0 billion. The comparable figures for the second quarter of 2014 were $3.7 billion for both net and comprehensive income. The quarter's results were substantially lower than that reported one year earlier when the company reported net income of $8.7 billion.
Based on September 30, 2014 net worth of $5.2 billion, Freddie Mac will pay 2.8 billion as a dividend to the Treasury Department in December, bringing total cash dividends paid to Treasury to $91.0 billion. Its obligation to the Treasury remains at $72.3 billion, representing the funds drawn from that source under its Senior Preferred Stock Agreement. Fannie Mae will pay $4.0 billion in dividends for a total of $134.5 billion in comparison to $116.1 billion in draw requests since 2008. Dividend payments by the two GSEs do not reduce prior Treasury draws.
Freddie Mac said its third quarter financial results were primarily driven by higher net interest income, lower derivative losses, and higher income from legal settlements. Specifically, net interest income increased from $3.5 billion in the second quarter to $3.7 billion in the third. Derivative losses dropped from $1.9 billion earlier to $0.6 billion. Legal settlements on private label securities rose from $0.4 billion to $1.2 billion.
These improvements were partially offset by a shift from a $0.6 billion credit benefit in the second quarter to an identical provision for credit losses in the third quarter. This was, the company said, due to a slight worsening in loss severity in the recent period while the second quarter benefited from severity improvement and mortgage insurance recoveries.
"It was another solid quarter for Freddie Mac, our twelfth straight of profitability," said Freddie Mac CEO Donald H. Layton. "The fundamentals of our business continued to improve, and the quarter ended with the lowest single-family seriously delinquent rate in more than five years. Our work to become a more competitive company is bearing fruit in increased customer satisfaction and market share between the GSEs. We also strongly delivered on our mission to be one of the leading sources of liquidity in the market, funding approximately one in four home loans and nearly 214,000 units of rental housing in the first nine months of 2014.
Freddie Mac said the post 2008 portion of its book of business is now at 58 percent of its single-family credit guarantee portfolio and refinances through the Home Affordable Refinance Program (HARP) and other relief refinance loans represent another 20 percent.
Fannie Mae said its net income in the third quarter of 2014 increased compared to the previous quarter due primarily to lower fair value losses and an increase in revenues. This increase was partially offset by a decline in credit-related income.
Net revenues increased to $6.0 billion from $5.3 billion primarily because of an increase in the proceeds from settlement agreements from its investments in private label mortgage related securities and in increase from $4.9 billion to $5.2 billion in net interest income. The later includes guaranty fee revenue and reflects higher amortization income from an increase in prepayments.
The company said an increasing portion of its revenues in recent years has been derived from guaranty fees rather than from interest on its retained mortgage portfolio assets. This is because of both the shrinking of the retained mortgage portfolio and increases in the guarantee fees. The company recognizes almost all of its guaranty fee revenue in net interest income and the percentage of net interest income derived from guaranty fees on loans underlying Fannie Mae MBS increased to approximately half in the first nine months of 2014, compared with approximately one-third in the first nine months of 2013. The company expects that guaranty fees will continue to account for an increasing portion of its revenues.
Fannie Mae's credit-related income declined from $1.9 billion in the second quarter to $0.8 billion in the third. This decrease was due to a decline in the company's benefit for credit losses due primarily to a slower rate of home price appreciation compared with the second quarter of 2014. This was partially offset by an incremental benefit for credit losses for the third quarter due to updates made in the quarter to the company's model and assumptions used to estimate its allowance for loan losses. Also contributing to the decrease in credit-related income was foreclosed property expense in the third quarter of 2014, compared with foreclosed property income in the second quarter of 2014.
"This was another solid quarter, with the company reporting strong financial results and continuing to provide much needed liquidity to the market," said Timothy J. Mayopoulos, president and chief executive officer. "We continue to build a strong book of business based on appropriate standards. We are committed to being our customers' most valued business partner and delivering the products, services, and tools our customers need to serve the entire market.