10-Q: Fannie Mae Reports Q2 Net Income Decline Amid Rising Credit Loss Provisions
Sentiment:
Quarterly Report
Fannie Mae's second quarter 2025 net income fell by $1.2 billion year-over-year, primarily due to a significant shift from a credit loss benefit to a provision for credit losses driven by lower home price growth and declining multifamily property values.
Worse than expectedNet income significantly decreased by $1.2 billion in Q2 2025 and $1.8 billion in H1 2025 compared to the prior year periods.A substantial shift from a benefit for credit losses to a provision for credit losses occurred, totaling $946 million in Q2 2025 and $970 million in H1 2025.Single-family credit provisions increased due to lower actual and projected home price growth.Multifamily credit provisions increased due to declines in actual and estimated near-term projected multifamily property values and new delinquencies.
Summary
- Net income for the second quarter of 2025 was $3.3 billion, a decrease of $1.2 billion compared to the second quarter of 2024.
- Net income for the first half of 2025 was $7.0 billion, a decrease of $1.8 billion compared to the first half of 2024.
- Net revenues in Q2 2025 decreased by $95 million to $7.2 billion compared to Q2 2024, and by $105 million to $14.3 billion for the first half of 2025 compared to the first half of 2024.
- A provision for credit losses of $946 million was recorded in Q2 2025, a $1.2 billion shift from a $300 million benefit in Q2 2024.
- The first half of 2025 saw a provision for credit losses of $970 million, a $1.5 billion shift from a $480 million benefit in the first half of 2024.
- The single-family provision for credit losses was primarily driven by lower actual and projected home price growth.
- The multifamily provision for credit losses was primarily driven by declines in actual and estimated near-term projected multifamily property values, as well as new delinquencies.
- Net worth increased by $7.0 billion in the first half of 2025 to $101.6 billion as of June 30, 2025, attributable to comprehensive income.
- Fannie Mae provided $177.5 billion in liquidity to the mortgage market in the first half of 2025, enabling the financing of approximately 668,000 home purchases, refinancings, and rental units.
- The single-family serious delinquency rate increased to 0.53% as of June 30, 2025, up 5 basis points from June 30, 2024, but down 3 basis points from December 31, 2024.
- The multifamily serious delinquency rate increased to 0.61% as of June 30, 2025, compared to 0.57% as of December 31, 2024.
- The retained mortgage portfolio decreased to $84.8 billion as of June 30, 2025, from $94.9 billion as of December 31, 2024.
- Total outstanding debt of Fannie Mae decreased to $128.3 billion as of June 30, 2025, from $139.4 billion as of December 31, 2024.
- The capital shortfall including buffers declined by $13 billion to $214 billion as of June 30, 2025, driven by increased retained earnings and lower minimum capital requirements.
- Multifamily property values declined 19% from their peak in Q2 2022 to Q2 2025.
- The U.S. weekly average 30-year fixed-rate mortgage rate was 6.77% as of June 26, 2025.
- Home prices on a national basis grew by an estimated 3.6% in the first half of 2025.
Sentiment
Score: 4
Explanation: While Fannie Mae's net worth increased and it continues to provide significant market liquidity, the substantial decline in net income driven by increased credit loss provisions due to deteriorating home price and multifamily property value forecasts indicates a challenging financial environment. The ongoing material weakness in internal controls due to conservatorship also presents a persistent concern.
Positives
- Net worth increased by $7.0 billion in the first half of 2025 to $101.6 billion.
- Base guaranty fee income increased in Q2 and H1 2025 due to higher average guaranty fees on recent single-family acquisitions.
- Administrative expenses decreased by $52 million in Q2 2025 compared to Q2 2024, primarily due to fewer employees and contractors.
- The capital shortfall under the enterprise regulatory capital framework declined by $13 billion (including buffers) in the first half of 2025.
- The single-family serious delinquency rate decreased by 3 basis points compared to December 31, 2024, and remains low relative to historic levels.
- Multifamily business volumes increased by 51% in the first half of 2025 compared to the first half of 2024, reflecting increased market activity.
Negatives
- Net income decreased significantly by $1.2 billion in Q2 2025 and $1.8 billion in H1 2025 compared to the prior year periods.
- A substantial shift from a benefit for credit losses to a provision for credit losses occurred, totaling $946 million in Q2 2025 and $970 million in H1 2025.
- Single-family credit provisions were driven by lower actual and projected home price growth, indicating increased likelihood of defaults and losses.
- Multifamily credit provisions were driven by declines in actual and estimated near-term projected multifamily property values and new delinquencies.
- Net interest income from portfolios decreased due to higher average rates on long-term funding debt issued in a higher-interest rate environment.
- The multifamily serious delinquency rate increased to 0.61% as of June 30, 2025.
- Multifamily property values declined 19% from their peak in Q2 2022 to Q2 2025.
- REO net sales price to unpaid principal balance and costs to repair declined to 83% for H1 2025 from 92% for H1 2024, indicating increased repair costs.
- Moody's downgraded Fannie Mae's long-term senior unsecured debt rating to Aa1 from Aaa on May 19, 2025, following a U.S. Government downgrade.
Risks
- Uncertainty regarding Fannie Mae's future, including the likelihood, timing, or nature of administrative or legislative actions relating to its future, and its exit from conservatorship.
- Exposure to macroeconomic conditions, including changes in GDP, unemployment rates, personal income, inflation, interest rates, credit spreads, home prices, and multifamily property values.
- Impact of trade, fiscal, regulatory, and immigration policies on economic conditions and financial results.
- Market and industry risks, including fluctuations in the size and share of the U.S. mortgage market, demand for Fannie Mae MBS, and competitive dynamics.
- Credit risk, including mortgage credit risk from loan defaults and institutional counterparty credit risk from mortgage servicers and insurers.
- Operational risks, including cyber and other information security risks, model risk, strategic risk, compliance risk, and reputational risk.
- Reliance on third parties, such as mortgage servicers and U.S. Financial Technology, LLC (U.S. Fin Tech), for critical operations.
- Potential for a decrease in credit ratings, which could increase borrowing costs and limit access to debt capital markets.
- Challenges in retaining and hiring qualified executives and other employees.
- Risks associated with the conservatorship, including FHFA's control and potential actions taken without Fannie Mae's knowledge that could materially affect financial performance.
- The possibility of a default by the United States government on its obligations or a government shutdown.
- Impact of environmental disasters, severe weather events, fires, floods, or other climate-related events on properties underlying the guaranty book of business.
- The effectiveness of risk management processes and related controls, and reliance on models and future updates to these models.
- Opportunities and risks presented by the use or anticipated use of artificial intelligence (AI) technologies.
- Changes in U.S. GAAP, guidance by the FASB, or SEC guidance, and their impact on accounting policies.
- A material weakness in internal control over financial reporting due to structural limitations under conservatorship, which is not expected to be remediated while in conservatorship.
Future Outlook
Fannie Mae expects U.S. GDP to grow for the full year of 2025, albeit at a slower pace than in 2024, with the unemployment rate projected to increase modestly by year-end. Single-family mortgage originations are forecasted to increase by approximately 14% in 2025, driven by an increase in refinance originations. Multifamily vacancy rates are expected to rise to 6.25% in 2025 due to elevated new construction completions, but rent growth is anticipated to be in the 2.0% to 2.5% range if job growth continues at its recent pace.
Management Comments
- The material weakness in internal control over financial reporting is not expected to be remediated while under conservatorship due to its structural nature.
- Management continues to monitor macroeconomic updates to inputs in the credit loss model to ensure the reasonableness of the inputs used to calculate estimated credit losses.
Industry Context
Fannie Mae operates as a leading source of financing for residential mortgages in the United States, chartered to provide liquidity and stability to the U.S. housing market and promote access to mortgage credit. Its performance is heavily influenced by broader macroeconomic conditions, including interest rates, home price trends, and multifamily property market dynamics. The company competes primarily with Freddie Mac and Ginnie Mae in the single-family mortgage-related securities issuance market. The current environment is characterized by continued high interest rates, which impact funding costs and refinancing volumes, and elevated new multifamily supply, which affects vacancy rates and property values.
Comparison to Industry Standards
- Fannie Mae's estimated share of single-family mortgage-related securities issuances is compared against its primary competitors, Ginnie Mae and Freddie Mac, with market share influenced by pricing and competitive market dynamics.
- Multifamily vacancy rates are compared to preliminary third-party data, with the national multifamily vacancy rate for institutional investment-type apartment properties remaining steady at 6.0% as of June 30, 2025, consistent with March 31, 2025, and June 30, 2024, and near the 15-year average of approximately 5.8%.
- Multifamily property values are assessed against data from the MSCI RCA Commercial Property Price Index (RCA CPPI TM), which indicates a 19% decline from their peak in Q2 2022 to Q2 2025.
- Multifamily property capitalization rates are estimated at 5.4% in Q2 2025, slightly down from 5.6% in Q1 2025 and Q2 2024, and are noted to have a significantly narrower spread to 10-year Treasury rates compared to pre-2022 levels, which is a key consideration for commercial real estate investors.
Management Changes
| Role | Previous Person | New Person | Effective Date | Reason |
|---|---|---|---|---|
| Chairman of the Board | Not specified, but implies a change from prior structure | FHFA Director | March 17, 2025 | FHFA Director's appointment to the role. |
| Board Member | Not specified | FHFA's General Counsel | Not specified, but implied concurrent with FHFA Director's appointment | Appointment as a member of the Board. |
Corporate Governance
| Change Type | Description | Effective Date | Impact Assessment |
|---|---|---|---|
| Board Composition | The FHFA Director now serves as the Chairman of the Board, and FHFA's General Counsel also serves as a Board member, reflecting FHFA's direct control as conservator. | March 17, 2025 | Reinforces FHFA's control over Fannie Mae, with the Board's fiduciary duties owed solely to FHFA as conservator, significantly restricting business activities and stockholder rights. |
| Internal Control Material Weakness | A material weakness in internal control over financial reporting persists due to inherent structural limitations under conservatorship, preventing adequate accumulation and communication of information known to FHFA for disclosure obligations. | Ongoing as of June 30, 2025 | This material weakness is not expected to be remediated while Fannie Mae is under conservatorship, indicating a persistent challenge in ensuring complete and accurate disclosure as required by GAAP. |
Legal Proceedings
- **In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations and Fairholme Funds v. FHFA (District of Columbia)**: A jury returned a verdict on August 14, 2023, awarding $299.4 million to Fannie Mae preferred stockholders. Final judgment was entered on March 20, 2024, including $199.7 million in prejudgment interest. Defendants filed an appeal on April 11, 2025, and plaintiffs filed a cross-appeal on April 25, 2025. Post-judgment interest accrues at 5.01% from March 20, 2024.
- **Rop et al. v. FHFA et al. (Western District of Michigan)**: The U.S. Court of Appeals for the Sixth Circuit reversed the dismissal on October 4, 2022, remanding the case to determine compensable harm. The Supreme Court denied review on June 12, 2023. Plaintiffs' motion to amend their complaint was denied on December 11, 2024. FHFA and Treasury filed motions for judgment on the pleadings in March 2025.
- **Wazee Street Opportunities Fund IV L.P. et al. v. FHFA et al. (Eastern District of Pennsylvania)**: The district court granted FHFA's and Treasury's motions to dismiss the case on April 30, 2025.
- **Fisher et al. v. United States of America (U.S. Court of Federal Claims)**: The case was dismissed with prejudice on September 1, 2023. Plaintiffs filed a notice of appeal on October 30, 2023.
Related Party Transactions
- Fannie Mae operates under a Senior Preferred Stock Purchase Agreement with the U.S. Department of the Treasury, which provides funding under certain circumstances and dictates dividend payments.
- Fannie Mae pays TCCA fees (10 basis point guaranty fee increase) to the Treasury, which are not retained by the company.
- Affordable housing allocations are paid to specified U.S. Department of Housing and Urban Development (HUD) and Treasury funds.
- FHFA assessments are paid to the Federal Housing Finance Agency to cover a portion of its costs, expenses, and working capital.
Stakeholder Impact
- **Shareholders**: Common and preferred stockholders' rights are significantly restricted due to conservatorship and agreements with Treasury. Ongoing legal proceedings related to the net worth sweep dividend provisions continue to impact their interests.
- **Employees**: Administrative expenses decreased in Q2 2025 due to fewer employees and contractors, but increased in H1 2025 due to severance accruals, indicating potential workforce adjustments.
- **Customers (Borrowers/Homeowners)**: Fannie Mae provided $177.5 billion in liquidity to the mortgage market, enabling financing for approximately 668,000 home purchases, refinancings, and rental units. The company offers various loss mitigation options to assist borrowers experiencing financial difficulties.
- **Lenders/Servicers**: Fannie Mae's business model relies on purchasing residential mortgage loans from lenders and providing guaranties on MBS. The potential acquisition of Mr. Cooper Group by Rocket Companies could increase single-family servicing concentration to entities controlled by Rocket Companies.
- **Creditors/Investors (Debt & MBS)**: Fannie Mae's credit rating downgrade by Moody's could potentially increase borrowing costs and limit access to debt funding. The company's guaranty on MBS provides credit protection to global investors.
- **U.S. Government (Treasury & FHFA)**: Treasury is a key financial supporter and recipient of TCCA fees and dividends. FHFA acts as both conservator and regulator, exerting significant control over Fannie Mae's operations and governance, including Board appointments.
Next Steps
- Fannie Mae and Freddie Mac are moving forward with an interim phase in the transition to new credit score models, permitting lenders to deliver mortgage loans using either classic FICO Score or VantageScore 4.0.
- Fannie Mae expects to publish historical FICO 10 T data and adopt scores from the model at a later date.
- Fannie Mae will update its Selling Guide and make additional changes to support the adoption of VantageScore 4.0 in the near future.
- Fannie Mae expects to pay affordable housing allocations for 2025 new business purchases to HUD and Treasury funds in 2026.
- Briefing on the appeal for the Senior Preferred Stock Purchase Agreements Litigation is currently scheduled to conclude in February 2026.
Key Dates
| Date | Description |
|---|---|
| 2008-09-01 | FHFA, as conservator, entered into a senior preferred stock purchase agreement with Treasury on Fannie Mae's behalf. |
| 2008-09-07 | Fannie Mae's conservator announced that no dividends would be paid on common or preferred stock, other than senior preferred stock. |
| 2010 | Fannie Mae stopped acquiring newly originated reverse mortgage loans. |
| 2011 | Temporary Payroll Tax Cut Continuation Act (TCCA) implemented a 10 basis point increase in guaranty fees on single-family mortgages. |
| 2012-08-01 | August 2012 amendment to the senior preferred stock purchase agreement implemented net worth sweep dividend provisions. |
| 2013-12-02 | Fisher et al. v. United States of America lawsuit filed by common stockholders of Fannie Mae. |
| 2017-06-01 | Rop et al. v. FHFA et al. lawsuit filed by preferred and common stockholders of Fannie Mae and Freddie Mac. |
| 2018-03-31 | Last date Fannie Mae received funding from Treasury under the commitment. |
| 2018-08-16 | Wazee Street Opportunities Fund IV L.P. et al. v. FHFA et al. lawsuit filed by common stockholders of Fannie Mae and Freddie Mac. |
| 2018-11-01 | Reference date for CAS debt issued prior to November 2018. |
| 2021-02-01 | The enterprise regulatory capital framework went into effect. |
| 2022-10-04 | U.S. Court of Appeals for the Sixth Circuit reversed the dismissal and remanded the Rop et al. v. FHFA et al. case. |
| 2022-10-01 | FHFA announced the validation and approval of FICO Score 10 T and VantageScore 4.0 credit score models. |
| 2023-02-15 | Court issued an order for plaintiffs to show cause why their claims should not be dismissed in Fisher et al. v. United States of America. |
| 2023-06-12 | The Supreme Court denied the petition for review in Rop et al. v. FHFA et al. |
| 2023-07-24 | Trial commenced for In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2023-08-11 | Plaintiffs submitted a motion for leave to file an amended complaint in Rop et al. v. FHFA et al. |
| 2023-08-14 | Jury returned a verdict for the plaintiffs and awarded damages of $299.4 million to Fannie Mae preferred stockholders in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2023-09-01 | The Fisher et al. v. United States of America case was dismissed with prejudice. |
| 2023-10-24 | The court held that stockholders were entitled to receive prejudgment interest on the damage award in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2023-10-30 | Plaintiffs filed a notice of appeal in Fisher et al. v. United States of America. |
| 2023-12-01 | FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. |
| 2024-03-20 | The court entered final judgment and set the amount of prejudgment interest owed by Fannie Mae at $199.7 million in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2024-04-17 | Defendants filed a motion for judgment as a matter of law in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2024-11-01 | FASB issued ASU 2024-03, Income Statement Reporting Comprehensive Income Expense Disaggregation Disclosures. |
| 2024-12-11 | The court denied plaintiffs' motion for leave to file an amended complaint in Rop et al. v. FHFA et al. |
| 2025-03-14 | The court denied defendants' motion for judgment as a matter of law in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2025-03-17 | The FHFA Director began serving as the Chairman of Fannie Mae's Board. |
| 2025-03-27 | FHFA filed a motion for judgment on the pleadings in Rop et al. v. FHFA et al. |
| 2025-03-28 | Treasury filed a motion for judgment on the pleadings in Rop et al. v. FHFA et al. |
| 2025-03-31 | Rocket Companies, Inc. announced a definitive agreement to acquire Mr. Cooper Group. |
| 2025-04-01 | Plaintiffs filed a motion for leave to amend their complaint in Rop et al. v. FHFA et al. |
| 2025-04-11 | Defendants filed a notice of appeal in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2025-04-15 | A co-borrower of a single-family loan was designated by OFAC as a Specially Designated National. |
| 2025-04-25 | Plaintiffs filed a notice of cross-appeal in In re Fannie Mae/Freddie Mac Senior Preferred Stock Purchase Agreement Class Action Litigations. |
| 2025-04-30 | The district court granted FHFA's and Treasury's motions and dismissed the Wazee Street Opportunities Fund IV L.P. et al. v. FHFA et al. case. |
| 2025-05-06 | A payment of $881.88 relating to the loan from the designated co-borrower was received. |
| 2025-05-16 | Moody's Ratings downgraded the U.S. Government's long-term issuer and senior unsecured ratings to Aa1 from Aaa. |
| 2025-05-19 | Moody's Ratings downgraded Fannie Mae's long-term senior unsecured debt rating to Aa1 from Aaa. |
| 2025-06-26 | The U.S. weekly average 30-year fixed-rate mortgage rate was 6.77%. |
| 2025-06-30 | End of the second fiscal quarter for the report. Fannie Mae's net worth was $101.6 billion, and the aggregate liquidation preference of senior preferred stock increased to $219.8 billion. |
| 2025-07-11 | Date of latest data available for the Economic and Strategic Research Group's July forecast. |
| 2025-07-30 | Filing date of the Quarterly Report on Form 10-Q. |
| 2025-09-30 | The aggregate liquidation preference of the senior preferred stock will further increase to $223.1 billion. |
| 2025-12-31 | Expected home price growth of 2.8% on a national basis for the full year of 2025. Expected unemployment rate to increase modestly by year-end. |
| 2026-02-01 | Briefing on the appeal for the Senior Preferred Stock Purchase Agreements Litigation is currently scheduled to conclude. |
| 2026 | Expected payment of affordable housing allocations for 2025 new business purchases. |
| 2026-12-15 | Effective date for ASU 2024-03, Income Statement Expense Disaggregation Disclosures, for fiscal years beginning after this date. |
| 2027-12-15 | Effective date for ASU 2024-03, Income Statement Expense Disaggregation Disclosures, for interim periods beginning after this date. |
Recommendation
holdFannie Mae's financial results show a significant decline in net income driven by increased credit loss provisions, reflecting challenges in the housing and multifamily markets due to lower home price growth and declining property values. While the company's net worth has increased and it maintains substantial liquidity, the ongoing conservatorship, persistent capital shortfall, and unresolved legal proceedings create significant uncertainty. The recent credit rating downgrade also adds pressure. Given these mixed signals and the inherent structural limitations under conservatorship, a 'hold' recommendation is appropriate for seasoned investors, as the long-term outlook remains heavily dependent on regulatory and legislative actions, and market conditions that are currently unfavorable for credit performance.
Keywords
Fannie Mae, Mortgage, Housing Market, SEC Filing, 10-Q, Financial Results, Credit Risk, Conservatorship, Mortgage-Backed Securities, Real Estate, US Housing, GSE, Financial Performance, Loan Losses, Capital Requirements, Interest Rates, Home Prices, Multifamily Housing
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