FNMA Fannie Mae (QB)

By Andrew Ackerman 

WASHINGTON -- Government-controlled mortgage giants Fannie Mae and Freddie Mac reported improved earnings in the third quarter, as record-low interest rates fueled a refinancing boom that buoyed the companies' results.

The earnings are the latest evidence that the housing market remains a bright spot in the coronavirus-stricken economy. Sales of previously owned homes, which make up the bulk of the housing market, rose 2% in August from a month earlier, according to the National Association of Realtors.

Fannie Mae, the larger of the two companies, said Thursday its net income rose to $4.23 billion from $2.55 billion in the previous three months. Net income in the same quarter of 2019 was $3.96 billion. Fannie's smaller sister company, Freddie Mac, reported net income of $2.46 billion, up from $1.78 billion in the second quarter.

The two companies reap fees from the mortgages they guarantee. As mortgages are refinanced, fees normally booked over the life of a loan can be booked immediately. The companies said their third-quarter earnings were boosted by their ability to book those fees more quickly.

At the same time, the companies reported a steady decline in the number of borrowers who have suspended payments as the labor market began to recover, suggesting reduced strain on their businesses. Some 4.1% of Fannie's single-family loans were in forbearance as of Sept. 30, down from 5.7% at the end of June.

Jim Vogel, executive vice president at FHN Financial, said in a note that Fannie's results reflect "one of the better bottom lines in recent years," and show "acceleration in organic business with an improving single-family market."

He said Freddie produced "a strong quarter as well, with a little less zip than seen in Fannie's numbers."

The news wasn't all rosy. For the year as a whole, Fannie said it expects net income to be lower compared with 2019 because of the economic fallout from the coronavirus pandemic. And it warned that the outlook remains cloudy.

"Given the unprecedented nature of the Covid-19 pandemic and the fast pace at which new developments relating to the pandemic are occurring, it is difficult to assess or predict the long-term effects of the pandemic on our financial performance," the company said.

To recoup coronavirus-related costs, the companies are scheduled to impose a 0.5% surcharge on most on most refinanced mortgages that they back beginning Dec. 1.

Fannie and Freddie run the plumbing that makes U.S. mortgages more readily available and affordable. The 30-year fixed-rate mortgage, by far the most popular in the U.S., wouldn't be as widely available without them.

The companies don't make mortgages but buy them from lenders and package them into securities to sell to investors, and they provide guarantees to investors in case the mortgages go bad. They guarantee nearly half of the $11 trillion U.S. mortgage market.

The 30-year fixed rate mortgage averaged 2.81% in the week ended on Thursday, down from 3.78 percent a year ago, according to Freddie Mac.

The firms were taken over by the government after they came close to collapse during the financial crisis of 2008. The Trump administration wants to return them to private hands, though they must raise tens of billions of dollars in additional capital before they will be able to operate fully independently -- a process that could involve years of accumulated earnings and potential new share sales.

Write to Andrew Ackerman at andrew.ackerman@wsj.com

(END) Dow Jones Newswires

October 29, 2020 11:54 ET (15:54 GMT)

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