Fannie Mae Loses $1.3 Billion, Reverse Market Share Falls Below 1%

NewImage.jpgFannie Mae reported a net loss of $1.3 billion in the third quarter of 2010 on Friday afternoon, up from $1.2 billion in the previous quarter.

The company’s net loss attributable to common stockholders was $3.5 billion, including $2.1 billion in dividend payments to the U.S. Treasury.  The GSE said it requested $2.5 billion from the Treasury to eliminate the company’s net worth deficit of $2.4 billion as of September 30, 2010.

“Our operating results reflect our ongoing efforts to manage the credit-related expenses in our legacy business and build a new, profitable book of business,” said Fannie Mae President and CEO Michael J. Williams.


“The loans we have acquired since the beginning of 2009 reflect our commitment to realistic, common-sense lending standards and sustainable homeownership. Their credit profile remains strong, and we expect these loans to be profitable over their lifecycle. We are building this new book of business while we continue to provide liquidity to America’s housing market as it struggles to recover, and to support programs to help families stay in their homes and avoid foreclosure whenever possible.”

According to SEC documents, the GSE’s outstanding unpaid principal balance of reverse mortgages in its portfolio was $50.8 billion as of September 30, 2010 and $50.2 billion as of December 31, 2009.  Fannie Mae’s market share of new reverse mortgage acquisitions fell below 1% in the third quarter of 2010, down from 20% in the third quarter of 2009.

“The decrease in our market share was a result of changes in our pricing strategy and market conditions,” said Fannie Mae.  “Because home equity conversion mortgages are insured by the federal government, we believe that we have limited exposure to losses on these loans.”

The GSE announced it would no longer purchase reverse mortgages in October due to systems lacking the ability to handle the new HECM Standard and Saver products

Chart: FNMA Reverse Mortgage Portfolio Size


FNMA Reverse Mortgage Portfolio Size

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  • I know that I am simplifying this, but if Fannie Mae is under a mandate to reduce their balance sheet holdings, wouldn’t it make sense for them to complete Ginnie Mae securities for their reverse mortgage holdings?

    I understand that they are mostly aged loans and a majority are probably CMT based, which will not fetch top dollar. But, given FNMA’s billions of dollars they have lost so far, this would merely be a drop in the bucket.

    • ReverseGuy,

      As a US taxpayer, I find your suggestion odd and a little distrurbing.

      The 112th Congress will be seated in a few months. Why not hear out or suggest Fannie Mae strategies at that point? The Fannie Mae mandate is far too cumbersome and needs to be readdressed anyway.

      It is still my position that an exception should be cut out for HECMs and Fannie Mae should be structured in such a way as to purchase adjustable rate HECMs.

      Will the Fed QE2 (or QE3) extend to Fannie Mae? Selling off HECMs to the Fed seems like a reasonable alternative.

  • I agree that the mandate needs to be re-addressed and is a bit misguided, but the likelihood of that occuring (or creating a “carve out” for HECMs) anytime in the near term is highly unlikely, in my opinion.

    So, in the interim, why is it odd for me to suggest that they consider pooling their extensive HECM holdings in to GNMA securities? It would allow them to clear these loans off of their balance sheet, help them get closer to their mandated decrease in holdings, and might actually result in them being able to “open the gates” again and start purchasing HECM loans.

    • ReverseGuy,
      Why incur an actual loss? Worse yet even if FM clears out all of their HECM volume, why would it go back to buy an asset that grows as it is being carried? Will they have to sell it off at a loss once again?
      The longest they need to carry a HECM is to its cross over point. For a lot of their HECM inventory the cross over point might not be far away. Why not sell off the assets on which they have already taken valuation losses? If they can get their carrying value, FM would not take any more loss on those assets. Thus they would gain cash on the back of their riskier assets which was the goal Congress had in mind.
      I can see no benefit to taking a loss on an asset simply to get rid of it if you have other assets you can liquidate with no further losses. It makes no economic sense.

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