Several factors at play are likely to keep profits rolling in for years at the Federal National Mortgage Association and the Federal Home Loan Mortgage Corp.
Washington, D.C.-based Fannie Mae reported that it earned $10.1 billion before taxes in the third quarter of this year.
At secondary rival Freddie Mac, third-quarter income prior to taxes was $6.5 billion. Including a $23.9 billion benefit from deferred tax assets, the McLean, Va.-based firm’s after-tax third-quarter profit was $30.4 billion.
A report from Moody’s Investors Service indicates that the pair of government-controlled enterprises will continue to show strong profitability over the next few years as their asset quality continues to improve.
The ratings agency noted that Fannie and Freddie will continue to benefit from an improved housing market.
Lower provisions for loan losses will support profitability in the second half of this year, though the positive impact will diminish as provisioning begins to normalize.
A “dramatic” increase in guarantee fees will also support future profitability.
Another factor supporting positive earnings is historically high market share as a result of their continued cost advantage compared to private capital. Although the Federal Housing Finance Agency is attempting to reduce GSE dominance in the mortgage market, the regulator’s success in this area is uncertain.
“Despite this increased profitability, the GSEs still rely on the U.S. Treasury for future capital needs, and GSE reform remains elusive despite much political activity,” New York-based Moody’s said. “The rating agency believes that the longer the stalemate regarding GSE reform continues, the more likely the GSEs will remain entrenched in the mortgage finance market.”
Moody’s said that Fannie’s and Freddie’s debt ratings are likely to move with ratings on U.S. sovereign debt even through future debt ceiling negotiations.
