Fannie Mae rebuilds capital cushion with enough left to pay dividend

Fannie Mae's first-quarter profits were enough for it to rebuild its minimum capital buffer and pay the Treasury Department dividend after being forced to take a draw during the previous fiscal period.

Fannie recorded more than $4 billion in net income in the quarter, up from almost $3 billion in the first quarter of 2017, and a net loss of more than $6 billion during the fourth quarter of 2017 that stemmed from a one-time adjustment to the value of its deferred tax assets.

The comprehensive income measure used to determine Fannie's dividend to Treasury was less than $4 billion, so Fannie was able to retain a minimum $3 billion capital buffer and pay a dividend of more than $900 million.

"We're replenishing the $3 billion capital buffer and paying the rest as a dividend," President and CEO Tim Mayopoulos said in an interview with National Mortgage News.

Fannie's smaller rival, Freddie Mac, also generated a multibillion-dollar profit during the first quarter. But while Freddie's comprehensive income of more than $2 billion allowed it to begin to rebuild its capital base, it wasn't enough to return a dividend to Treasury. Both GSEs' capital bases had dwindled in line with reforms drawn up by their conservator and regulator, the Federal Housing Finance Agency, until late last year, when they each were allowed to retain a minimum $3 billion.

While Freddie last year adopted hedge accounting that smooths out volatility in earnings that occurs when interest rates change, Fannie has not. But Fannie does plan to eventually switch to hedge accounting, David Benson, its chief financial officer, said in an interview.

"We do have the intent at some point in the future to have that capability," he said, noting that the change is unlikely to occur this year. Accounting authorities have been making changes to hedge accounting rules and Fannie wanted to see those finalized before making a change, added Mayopoulos.

Other changes in the works at Fannie include structuring its credit risk transfer deals as notes issued by real estate mortgage investment conduits. Fannie has transferred some portion of its risk on 34% of its single-family portfolio, according to its earnings release.

REMIC treatment "broadens and deepens" the market for the CRTs, Benson said in the interview.

Serious delinquency rates, which CRT investors watch closely, remained above 1% in Fannie's most recent earnings but fell to 1.16% from 1.24%.

"We had been seeing a gradual decline in SDQ rate for quite a long time," Mayopoulos told National Mortgage News. "It had had an increase as a result of the hurricanes last year. We've started to see it come back down again and we would expect that to continue as issues relating to the hurricanes get resolved."

Mayopoulos noted in an earnings conference call that Fannie is using artificial intelligence and natural language processing technologies to help make its guidelines for servicers and lenders easier to search.

The technology also gives feedback to Fannie on frequently searched topics that suggest a need for clarification on particular topics. That could lead to "refinements" in guidelines, Mayopoulos told NMN.