Robust Growth Seen for Mortgage Giants
It was a quarter of controversy and uncertainty for mortgage giants Fannie Mae and Freddie Mac, but it won’t stop them from turning out healthy earnings increases.
Indeed, Wall Street expects Fannie Mae to bring in second-quarter earnings of $1.86 a share, up 20% from $1.55 a year ago. At least one analyst, Sandler O’Neill & Partners’ Michael McMahon, pegs the number even higher at $1.89 a share.
Freddie Mac is expected to post earnings of $1.41 a share, up from $1.30 a year earlier. However, Freddie has delayed the release of its results until the third quarter, when it has completed restating its earnings from the last few years. As a result, its earnings could be higher than currently projected.
Freddie shook up Wall Street in the quarter when it dropped a bombshell, announcing that investigations were underway into accounting irregularities, that three of its top executives had been replaced and that it had understated its earnings over the last three years by $1.5 billion to $4.5 billion.
The debacle prompted a renewed push by Rep. Richard H. Baker (R-La.) to overhaul the way Fannie and Freddie are regulated. Freddie is also the focus of criminal and securities investigations and at least 17 shareholder lawsuits.
Fannie -- hoping to distance itself from Freddie -- fired off a statement, indicating it “fully complies” with generally accepted accounting principles and with all Securities and Exchange Commission accounting requirements.
Despite the controversy, company executives, analysts and investors emphasized that the accounting troubles don’t affect Freddie’s financial health or ability to buy mortgages.
The lowest mortgage rates in more than 40 years, a booming housing market and a surge in originations helped Fannie and Freddie enjoy another round of robust earnings growth in the second quarter.
The average rate for a 30-year fixed-rate mortgage was 5.3% in the quarter, down from 6.7% a year ago, according to Phil Colling, an economist at the Mortgage Bankers Assn.
The low rates triggered a surge in refinancings as homeowners prepaid their mortgages and refinanced at a lower rate. Refinancings accounted for about 75% of mortgages originated in the quarter, JMP analyst Jim Fowler estimated.
Mortgage finance expert Jonathan Gray estimated originations totaled about $1.1 trillion in the second quarter, up from $495 billion a year ago.
The low rates and refinancings bode well for Fannie and Freddie, which rely on a healthy supply of fixed-rate mortgages to bulk up their portfolios.
However, competition from banks, thrifts, pension funds and other financial entities limited the companies’ buying opportunities. Banks and others have jumped into the mortgage-backed securities market over the last year because of the drop-off in commercial financing activity.
As demand for these securities surged, spreads tightened between funding costs and yields on mortgages purchased, causing Fannie and Freddie to sit on the sidelines, McMahon said. As a result, Fannie’s and Freddie’s portfolio growth wasn’t as big as it could have been.
Still, McMahon said banks and others probably will sell their mortgage-backed securities as the economy improves and commercial financing comes back, probably in the second half of the year. When this happens, it will provide a huge buying opportunity and growth for Fannie and Freddie, he said.
