The Federal Housing Finance Agency (FHFA) recently said in its annual report to Congress that Fannie Mae’s earnings—$84 billion last year, compared to $17.2 billion in 2012—are unsustainable.
According to the report, which is part of the agency’s mission to ensure soundness and safety in Fannie Mae and Freddie Mac, the elevated earnings were driven by non-recurring income sources, such as credit-related income and a tax benefit.
“Notwithstanding the benefit that credit-related income provided to 2013 earning, high levels of problems assets are likely to continue to apply downward pressure on earnings,” the report said. “Further earnings will also be adversely impacted by the mandated decrease in the size of Fannie Mae’s retained mortgage portfolio.”
The FHFA said that while Fannie and Freddie have taken steps to improve their oversight and risk profiles, Freddie holds a considerable number of problem mortgages and private-label securities acquired before the enterprise was placed in conservatorship.
“The chief source of concern is the year-end 2013 single family seriously delinquent mortgage rate, which is five times greater than the rate in 2006,” the report said. “Freddie Mac also has a high level of private-label mortgage-backed securities, residual risk from modifications and relief finances and ongoing contemporary credit risks.”
Freddie’s financials improved in 2013—the net income of $48.7 billion was the highest ever recorded for the enterprise. The report said, however, that like Fannie, the level of earnings is unsustainable because of a planned reduction in the retained mortgage investment portfolio and non-recurring income sources.