DS News

56 FHFA: UNCERTAINTY REMAINS AS TO GSES FINANCIAL SUSTAINABILITY While Fannie Mae and Freddie Mac each reported a net worth of more than $2 billion as of the end of 2014, some uncertainty remains as to their financial sustainability according to FHFA's 2014 Report to Congress released in mid-June. Fannie Mae reported a positive net worth of $3.7 billion as of the end of 2014, slightly more than half of which ($1.9 billion) represented a dividend obligation to the Department of Treasury, whichwas paid on March 31, 2015. Fannie Mae's net income for 2014 of $14.2 billion was only a fraction of the $84 billion the GSE reported for 2013, according to FHFA. "Overall, uncertainty remains over the sustainability of earnings given the sensitivity of Fannie Mae's earnings to macro-economic events and changing conditions in the housing market," the report said. "Although Fannie Mae forecasts it will remain profitable, earnings in future years are expected to decline. is is primarily due to the expectation of lower income from resolution agreements and credit- related income, and continued declines in net interest income given the requirement to reduce the level of mortgage assets held on the balance sheet." Despite strengthening credit risk management in 2014, Fannie Mae maintained an elevated level of risk due to the number of delinquent loans, foreclosed properties, nonaccrual loans, and restructured loans that remain above historical norms and are projected to remain that way for many years, according to FHFA. Fannie Mae continues to hold a large portfolio of REO properties and is unable to market or sell many of those properties due to restrictions placed on them by local and state laws. About 330,000 Fannie Mae-backed mortgages were seriously delinquent as of the end of 2014, and approximately 34 percent were delinquent by 25 or more months, according to FHFA. Mortgages originated between 2005 and 2008 in the years leading up to the housing bust accounted for about 59 percent of those seriously delinquent loans. About 22 percent of the seriously delinquent loans at the end of 2014 had LTV ratios above 100 percent. "Resolving and minimizing the financial impact of these problem assets will be an ongoing challenge for the Enterprise," FHFA said in the report. Freddie Mac reported positive net worth of $2.7 billion as of the end of 2014, about $0.9 billion of which represented a dividend obligation to Treasury paid on March 31, 2015. Like fellow GSE Fannie Mae, Freddie Mac's 2014 net income of $7.7 billion was well below its 2013 reported net income of $48.7 billion. Structured debt issuances and insurance transactions resulted in the reduction of single- family credit risk for Freddie Mac in 2014. e enterprise transferred $126 billion in unpaid principal balance for single-family mortgages through these transactions, which included $105 billion in UPB through STACR Structured Agency Credit Risk (STACR) issuances. ree Agency Credit Insurance Structure (ACIS) transactions accounted for the remaining $21 billion. Freddie Mac, like Fannie Mae, has a single- family mortgage portfolio that contains high levels of seriously delinquent mortgage loans and distressed private-label securities, which are major sources of credit risk for the enterprise. Other sources of credit risk include residual risk from modifications and relief finance activities as well as ongoing concerns over counterparty credit risk, according to FHFA. "Asset quality remains a supervisory concern despite a year-over-year improvement in single- family credit metrics," the report said. Despite maintaining profitability over 2013 and 2014, like Fannie Mae, a degree of uncertainty exists around Freddie Mac's ability to remain financially stable. "Freddie Mac's future earnings prospects are subject to several economic and company- specific risk drivers that could significantly affect profitability," FHFA said in the report. "ese risks include a large real estate owned portfolio, a backlog of seriously delinquent single-family loans, uncertain house price appreciation, interest rate movements, and a continued decline in mortgage-related investments. Additionally, it is unlikely that future settlements will significantly contribute to earnings." REO SHARE'S CONTINUED DECLINE INDICATES A HEALING MARKET e percentage of total home sales that were REO sales declined substantially from February to March, falling from 9.7 percent down to 8.4 percent, indicating the market as it pertains to distressed assets is "healing" and "normalizing," according to CoreLogic's Cash Sales Share Data for March 2015 released in June. In January 2011 at the height of the fore- closure wave, when cash sales reached their peak, REO sales made up 23.9 percent of all home sales, according to CoreLogic. Resales, which typically comprise about 80 percent of cash sales, have the most weight on the overall share of cash sales. "e drop in REOs indicates that the market continues to heal and normalize as it pertains to distressed assets," said Sam Khater, deputy chief economist at CoreLogic. "But the Great Recession will still have cast a long shadow on the real estate market and REO sales will remain elevated for years as hardest hit areas and slow to react areas con- tinue to recover." e cash sales share for REO properties dropped by more than 3 percentage points month-over-month in March down to 56.2 percent, meaning 56.2 percent of REO sales during the month were cash sales. As has historically been the case, REO sales had the largest cash sales share in March, followed by resales (34.5 percent), short sales (31.6 percent), and new home sales (14.9 percent). All those numbers represented declines from February, according to CoreLogic. March marked the 27th consecutive month of year-over-year declines for overall cash sales, which made up 34.6 percent of total home sales during the month. e peak for cash sales share was 46.5 percent, achieved in January 2011. Prior to the housing crisis, cash sales share averaged about 25 percent. Core- Logic estimated if the current rate of decline continues, the cash sales share will be back down to 25 percent by the middle of 2016.

• Cover