Fannie Mae FNMA, +4.63% and Freddie Mac FMCC, +4.49% on Thursday reported earnings that reflected a healthy, yet slowing, housing market, even as weighty questions about their future swirl.
The two enterprises are at the heart of the American housing finance system: they buy mortgages from banks and other lenders, enabling lenders to extend credit for longer periods than would be possible if they had to keep the loans on their own balance sheets, and, presumably, open up the housing market to a larger swath of the population. Throughout 2018, the two companies together funded approximately 3.2 million mortgages.
In the fourth quarter, Fannie had net income of $3.2 billion, and Freddie had $1.5 billion. The two enterprises are still in government conservatorship, as they have been since the 2008 financial crisis, and will sweep those profits over to the U.S. Treasury in March, while continuing to retain a slim capital buffer of $3 billion each.
It is difficult to compare the companies’ financial results to the year-earlier quarter because that’s when changes in the tax laws left both with hefty accounting losses. Compared to the year ago quarter, Fannie’s pretax income fell to $4.06 billion from $4.96 billion, while Freddie Mac’s dropped to $1.39 billion from $3.82 billion.
The so-called “net worth sweep” is an arrangement devised in 2012 that directed the two companies to divert profits to taxpayers, but left the door open for them to take capital draws in any quarter in which they had a loss, as Fannie did last year. It is possible that this quarter could be the last time the sweep takes place.
See also: To free Fannie and Freddie, their regulator may bypass do-nothing Congress
On Thursday, the Trump administration’s pick for head of the regulatory agency overseeing Fannie and Freddie, Mark Calabria, is facing the Senate Banking Committee. As MarketWatch was first to report, the interim director of the regulator, the Federal Housing Finance Agency, has already begun working with Treasury to lay out a long-term vision for the American housing finance system, finally freeing the two companies from conservatorship.
If he is approved, Calabria’s responsibility will include two companies that look vastly different than the entities that helped plunge the U.S. economy into turmoil about a decade ago. In the fourth quarter, Fannie’s serious delinquency rate was just 0.76%, and Freddie’s was 0.69%, both near historical lows. Both companies continue to experiment with additional ways of selling slices of their portfolio to private-market investors, in order to spread the risk more broadly. And they continue to work toward the issuance of a single bond, a step that aligns their fortunes more closely, rather than intensifying the competition between them.
Read: As Fannie-Freddie reform gets underway, here are the three big questions for the housing market
The enterprises are achieving those goals even as they help Americans access stable housing. Freddie’s earnings noted that first-time homebuyers made up 46% of mortgage purchase loans in 2018, while nearly all of the apartment rental units it helped finance were for low- and moderate-income Americans. Fannie touted its commitment to “providing support for both affordable and workforce housing,” which it accomplished by having 56% of its mortgage funding go to low- and moderate-income households.
Still, big questions remain: what kind of reforms will FHFA and Treasury implement? Will interest rates behave at the same that the revamped agencies are getting their footing again? Ten years into an economic expansion and seven years into the expanding housing cycle, how will market conditions hold up?
“I believe we are truly at a critical juncture in housing finance policy,” Calabria said in prepared remarks that he delivered to lawmakers. “Families across America face heavy burdens making their rent or mortgage payments in many cities, towns and states, as well as the unique barriers faced in our rural and tribal communities. I also strongly believe that shelter is one of the most critical of basic needs facing any family. Whether it is rented or owned, American families need an affordable place to call home.”
See also: Congress wouldn’t do it, so Fannie and Freddie reformed themselves