Coverage: Getting a mortgage may be easier

Fannie Mae and Freddie Mac reported earnings on Thursday, and there was a lot to digest. Profit dropped at both mortgage-finance companies, they’re returning billions to the U.S Treasury, and they said it might be easier for consumers to get loans.

The Wall Street Journal story by Joe Light had all the details at the top of the story:

Fannie Mae and Freddie Mac reported sharply lower profits but still earned enough for a combined $6.8 billion payment to the U.S. Treasury, as the mortgage-finance companies also cited the potential for a thaw in home-loan access.

Both companies said the decline in net earnings doesn’t signal problems with their underlying businesses. Rather, the weaker results stemmed mainly from issues related to slower home-price appreciation, which allowed the companies to decrease their reserves less quickly, and changes in interest rates. Freddie’s large decline in net income was also affected by a $23.9 billion tax benefit recorded in the year-ago quarter.

Fannie and Freddie don’t make loans, but buy loans from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default. After the financial crisis, the companies forced lenders to buy back billions of dollars in loans that the companies said ran afoul of their standards, which some lenders have said have led to them making loans only to buyers with high credit scores.

During conference calls Thursday with reporters, both companies gave early indications that an October agreement with lenders could lead to expanded mortgage access. The agreement, reached with the companies and their regulator, the Federal Housing Finance Agency, clarifies some of the penalties lenders could face for making loans that end up not meeting the companies’ standards.

The Reuters story by Lindsay Dunsmuir had these details about the earnings of both companies:

Fannie Mae, the bigger of the two and the nation’s largest source of mortgage funds, earned a net income of $3.9 billion in the third quarter, up from $3.7 billion in the second quarter.

The increase was driven by higher net interest income, an increasing portion of which is derived from guaranty fees, and about $1.2 billion in settlement payments from Goldman Sachs (GS.N) and HSBC (HSBA.L) related to Fannie’s investments in private-label mortgage securities sold by the two banks before the credit crisis.

Slowing home-price appreciation was the primary drag on Fannie’s profit growth. The firm reported credit-related income of $836 million, the lowest since having negative credit-related income in the third quarter of 2012.

Based on its own home price index, Fannie estimated that U.S. home prices increased just 1.2 percent in the third quarter and are up just 5.3 percent in the year to date, after gaining 8.2 percent in 2013.

On a year-over-year basis, Fannie’s net income was down from $8.7 billion a year earlier.

Bloomberg’s Clea Benson had this background about what happened during the financial crisis:

Fannie Mae and Freddie Mac (FMCC) were seized by regulators in September 2008, just before the failure of Lehman Brothers Holdings Inc., amid losses that pushed them toward collapse. The companies provide liquidity to the mortgage market by buying loans and packaging them into guaranteed securities.

Fannie Mae received $116.1 billion in aid from the Treasury and is required to send all of its profits back to the U.S. under the terms of the bailout. The company will have sent taxpayers a total of $134.5 billion after its next payment, an amount that counts as a return on the U.S. investment and not as repayment of the aid.

The company’s common stock, which doesn’t trade on an exchange, is down 23 percent for the year at $2.32 per share, after reaching a high of $6.35 in March.

Peter Eavis wrote for The New York Times that the current director was looking for ways to get more loans to consumers:

Fannie Mae and Freddie Mac, another large government-backed entity that guarantees mortgages, are regulated by the Federal Housing Finance Agency. Under its director, Melvin L. Watt, the agency has recently taken steps that aim to ease the flow of housing credit. Since the financial crisis of 2008, some 80 percent of mortgages have had some form of taxpayer guarantee. In other words, banks still make mortgages, but they turn around and sell most of them to bond investors with a government backstop attached.

Most of that backstop comes from Fannie and Freddie, which typically only guarantee mortgage amounts that are equivalent to around 80 percent of the value of the underlying house. As a result, borrowers who take out loans backed by Fannie and Freddie often have to have the cash to make a down payment of some 20 percent of the value of the house. But thousands of potential borrowers struggle to amass the savings to make a down payment of that proportion, and they, therefore, fail to qualify for loans backed by Fannie and Freddie.

As part of a wider effort to increase the flow of housing credit, Mr. Watt said last month that he wanted Fannie and Freddie to back loans with down payments as low as 3 percent of the value of the home. He called that effort a “much needed piece to the broader access to credit puzzle.”

Mr. Watt, however, seemed to tamp down expectations about the down payment efforts, saying they were narrower initiatives than other things that the housing finance agency was doing to prompt more mortgage lending. The biggest measure was a relaxation of the terms under which the government can make banks take back soured mortgages.

That’s a lot to digest in one day. The two mortgage finance giants lost money, said they were going to try to get more loans into the hands of consumers and pay back some of the U.S. government’s money. What remains to be seen is if the companies will return to profitability and if they’ll be able to get more loans to consumers. Mortgages have been the backbone of the U.S. economy for years and it’s critical for banks and other lenders to figure out a way to get credit to consumers in a fiscally sound manner. We certainly don’t want a repeat of 2008.