10-Q: Fannie Mae Reports Mixed Results in Q3 2024 Amidst Housing Market Fluctuations

Fannie Mae's Q3 2024 results show relatively flat net revenues and a decrease in net income compared to Q3 2023, primarily due to decreased fair value gains and a reduced benefit for credit losses.

Summary

• Fannie Mae's net revenues were relatively flat in the third quarter of 2024 compared to the same period in 2023.
• Net income decreased by $655 million in Q3 2024 compared to Q3 2023, mainly due to lower fair value gains and a reduced benefit for credit losses.
• Year-to-date, net revenues increased by $522 million in the first nine months of 2024 compared to the same period in 2023, driven by an increase in net interest income.
• Net income decreased by $617 million in the first nine months of 2024 compared to the first nine months of 2023, primarily due to a decrease in benefit for credit losses and a decrease in fair value gains, partially offset by an increase in net interest income.
• Fannie Mae's net worth increased to $90.5 billion as of September 30, 2024, from $77.7 billion as of December 31, 2023.
• The company provided $273.9 billion in liquidity to the mortgage market in the first nine months of 2024, enabling the financing of approximately 993,000 home purchases, refinancings, and rental units.
• As of June 30, 2024, Fannie Mae owned or guaranteed an estimated 26% of single-family mortgage debt outstanding and an estimated 21% of multifamily mortgage debt outstanding in the United States.

Sentiment

Score: 4

Explanation: The document presents a mixed picture with some positive aspects like increased net worth and liquidity provision, but the negative trends in net income, fair value gains, and credit loss benefits, along with the identified risks, suggest a cautious outlook.

Positives

• Net worth increased to $90.5 billion as of September 30, 2024, from $77.7 billion as of December 31, 2023.
• Base guaranty fee income increased due to higher average remitted guaranty fees on new acquisitions.
• Net interest income from portfolios increased due to higher interest rates on securities in our corporate liquidity portfolio.
• The company met four of six 2023 single-family housing goals and all of its 2023 multifamily housing goals and subgoals.

Negatives

• Net income decreased in both Q3 2024 and the first nine months of 2024 compared to the same periods in 2023.
• Fair value gains decreased significantly in Q3 2024 compared to Q3 2023.
• The benefit for credit losses decreased in both Q3 2024 and the first nine months of 2024 compared to the same periods in 2023.
• Net deferred guaranty fee income decreased due to a lower balance of net unamortized deferred guaranty fees.
• Multifamily business volumes declined in the first nine months of 2024 compared with the first nine months of 2023, reflecting increased competition.
• The average charged guaranty fee on our multifamily guaranty book of business decreased as of September 30, 2024 compared with September 30, 2023 due to lower average charged fees on our acquisitions.

Risks

• The company is subject to housing goals, which may materially adversely affect its business, results of operations and financial condition.
• The company faces increased competition for the acquisition of single-family mortgage assets, which has impacted its share of single-family loan acquisitions and mortgage-related securities issuances.
• The company is exposed to interest-rate risk, which can impact multiple aspects of its multifamily loans.
• The company has discovered instances of multifamily lending transactions in which one or more of the parties involved engaged in mortgage fraud or possible mortgage fraud.
• The company is exposed to the risk that a counterparty in a derivative transaction will default on payments due to us.
• The company is exposed to climate risk, which can impact a variety of its existing risk categories, particularly credit risk.
• The company is exposed to the risk that one or more of the parties involved in a transaction will engage in fraud by misrepresenting facts about a mortgage loan.

Future Outlook

The company expects single-family housing starts to be higher in 2024 compared to 2023 due to elevated demand, and a decline in multifamily housing starts due to the large amount of new rental units expected to be completed in 2024. The company also expects the unemployment rate to continue to increase modestly in the fourth quarter of 2024. The company expects the credit performance of the loans in its single-family guaranty book of business may decline compared to recent performance, which could lead to higher delinquencies or an increase in its single-family serious delinquency rate. The company believes that vacancy levels could rise to 6.25% later this year or in early 2025, due to elevated new construction completions. The company believes that this new supply will also keep rent growth subdued in the fourth quarter of 2024, and 2024 rent growth at below-average levels, in the 1.0% to 1.5% range.

Management Comments

• Our forecasts and expectations are based on many assumptions, subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations.
• We will continue to closely monitor loan acquisitions and market conditions and, as appropriate, make changes to DU, including its eligibility criteria, so that the loans we acquire are consistent with our risk appetite and mission.

Industry Context

The report reflects the ongoing challenges and opportunities in the U.S. housing market, including fluctuations in interest rates, home prices, and housing activity. The company's performance is influenced by broader economic trends and regulatory changes, as well as competition from other players in the mortgage market. The company's focus on affordable housing and risk management is also highlighted in the context of its mission and regulatory requirements.

Comparison to Industry Standards

• Fannie Mae's share of single-family mortgage-related securities issuances is compared to Ginnie Mae, Freddie Mac, and private-label securities, showing increased competition.
• The report notes that Fannie Mae's market share is impacted by different variables such as its pricing of single-family loans and the competitive market environment.
• The report also notes that Fannie Mae has faced increased competition for the acquisition of single-family mortgage assets, which has impacted its share of single-family loan acquisitions and, in turn, its share of single-family mortgage-related securities issuances.

Legal Proceedings

• The company is involved in a number of legal and regulatory proceedings that arise in the ordinary course of business that we do not expect will have a material impact on our business or financial condition.
• The company is a defendant in two cases filed in the U.S. District Court for the District of Columbia, including a consolidated class action. The cases were consolidated for trial, and on August 14, 2023, the jury returned a verdict for the plaintiffs and awarded damages of $299.4 million to Fannie Mae preferred stockholders. On March 20, 2024, the court entered final judgment and set the amount of prejudgment interest owed by Fannie Mae at $199.7 million.
• The company is a defendant in a case filed in the U.S. District Court for the Western District of Michigan, where the U.S. Court of Appeals for the Sixth Circuit reversed the dismissal and remanded the case to the district court to determine whether the stockholders suffered compensable harm.
• The company is a defendant in a case filed in the U.S. District Court for the Eastern District of Pennsylvania, where plaintiffs filed a motion for leave to amend their complaint on July 1, 2024.
• The company is a nominal defendant in a case filed in the U.S. Court of Federal Claims, which was dismissed with prejudice on September 1, 2023, and is currently under appeal.

Related Party Transactions

• The company has related party transactions with Treasury, FHFA, and Freddie Mac, including TCCA fees paid to Treasury, regulatory assessment fees paid to FHFA, and contributions to CSS.
• The company also has related party transactions with Treasury and Freddie Mac through the purchase and sale of securities and the issuance of structured securities backed by Freddie Mac securities.

Stakeholder Impact

• The company's performance impacts shareholders through changes in net worth and potential future dividends.
• The company's activities affect borrowers through the availability of mortgage financing and loss mitigation options.
• The company's operations impact lenders and servicers through its underwriting and servicing standards and risk-sharing arrangements.
• The company's actions affect investors in mortgage-backed securities through the credit risk associated with those securities.

Next Steps

• The company will continue to closely monitor loan acquisitions and market conditions and, as appropriate, make changes to DU, including its eligibility criteria.
• The company will continue to work to improve its processes to further reduce the risk it faces from fraudulent practices, including implementing updates to its DUS Guide and expanding resources dedicated to overseeing multifamily sellers and servicers.
• The company will continue to pursue contractual remedies against multifamily lenders where we find breaches of the selling representations that lenders are required to provide on loans they sell to us, as well as against multifamily borrowers and sponsors.

Key Dates

Keywords

Fannie Mae, mortgage market, housing market, credit risk, interest rates, mortgage-backed securities, guaranty fees, net income, fair value, conservatorship, credit losses, liquidity, housing goals, mortgage insurance, delinquency rates