FHFA Report Highlights Progress, Concerns at GSEs

The Federal Housing Finance Agency (FHFA) submitted its 2013 Report to Congress, which detailed findings from the agency's latest examination of Fannie Mae and Freddie Mac. The report found that although experiencing significant exposure to credit losses from mortgage originations several years prior to the government's conservatorship, the two GSEs had record amounts of net income in 2013.

The report noted that combined net income for Fannie and Freddie totaled $132.7 billion, benefiting from a number of non-recurring items such as "the reversal of the valuation allowance associated with deferred tax assets and various legal settlements."

The FHFA found that the credit quality of new single-family guarantees in 2013 remained high by historical comparisons. They found that higher risk loans, such as no-income documentation or interest-only mortgages, have mostly been eliminated from the GSEs portfolio. Loan-to-value ratios for mortgages in 2013 stood at 73 percent, while the average credit score for purchase money mortgages stood in the 740s.

The agency noted that the average FICO score at the end of 2013 was roughly 25 points higher than scores prior to conservatorship.

The FHFA's report also found that although the Treasury's financial support helped stabilize the two companies, they are not in "sound financial condition."

"The Enterprises remain exposed to credit, counterparty and operational risks. Credit risk management remains a key priority for both Enterprises given their substantial amount of remaining legacy distressed assets and ongoing stress in certain housing markets," FHFA said. The agency also noted a growing shift—more mortgage servicing portfolios are being transferred from banking organizations to non-depository institutions.

Record keeping, legacy systems, and human capital all remain concerns for the government agency.

However, the FHFA believes that the Enterprises cannot remain in conservatorship permanently. The agency said that the expansion of private sector participation is essential for the long-term health of the mortgage market, with the goal of executing risk-sharing transactions on $30 billion of mortgages as having been met.

The FHFA believes that, "In particular, it is critical that the Enterprises dedicate appropriate resources to maintaining safe and sound operations in the face of uncertainty regarding the long-term prospects of the Enterprises' operations and charters."