Fannie Mae’s 2020 earnings fall due to COVID-related credit expenses

Fannie Mae's full-year net income fell, but linked-quarter profits climbed starting in the spring thanks to low interest rates and the resulting boom in refinance activity.

The government-sponsored enterprise reported fourth-quarter net income of $4.6 billion, up from $4.2 billion in the third quarter and $4.4 billion one year earlier. The government-sponsored enterprise logged $11.8 billion in net income in 2020, a drop from $14.2 billion in 2019 and $16 billion in 2018.

The annual decline was primarily due to nearly $900 million of credit-related expenses incurred as a result of the pandemic, which compared with $3.5 billion of credit-related income in 2019, Fannie’s chief financial officer, Celeste Mellet Brown, said on its earnings call.

Fannie’s fourth-quarter and yearly earnings outpaced Freddie Mac’s respective net incomes of $2.9 billion and $7.3 billion.

“Today’s Fannie Mae is far more resilient than Fannie Mae of yesterday,” Fannie CEO Hugh Frater said on the call. “In 2020, with the greatest labor market disruption since the Great Depression, we provided historic amounts of liquidity to the mortgage market, and we provided forbearance to more than 1.3 million homeowners to help keep them in their homes.”

With mortgage rates reaching new all-time lows in September and again in December, Fannie financed 1.5 million home purchases in 2020, a 20% jump from 2019. The GSE also refinanced 3.4 million loans, a 200% surge from the year before.

Fannie provided a record $1.4 trillion in single-family mortgage liquidity in 2020, with refinancing activity accounting for $948 billion — its highest amount since 2003. The overall volume represented a 135% spike from 2019. The single-family business made a quarterly net income of $3.9 billion — up from nearly $3.8 billion in the third quarter. It pulled in $9.9 billion for the year, down from $11.8 billion in 2019.

The multifamily segment produced a record $76 billion in annual volume. It brought in a net income of $626 million — up from $460 million in the third quarter — and over $1.9 billion in 2020 — down from $2.3 billion the year prior.

The GSEs started 2021 with the Treasury and the Federal Housing Finance Agency amending their preferred stock purchase agreements to allow them to hold more capital, another step toward a responsible exit from conservatorship. The agreement largely garnered support from around the mortgage industry.

The amendment allows Fannie to build funds until it achieves “adequate capitalization under the new enterprise framework,” Brown said. “This is essential as it remains a key unfinished aspect of our transformation under conservatorship.”

Fannie also notably readopted hedge accounting in an effort to reduce earnings volatility. The first impact of this adoption will be seen in the first quarter of 2021.