MReport July 2018

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TH E M R EP O RT | 63 SECONDARY MARKET THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Fannie Mae Moves in a Positive Direction The GSE's Q1 financial statement shows a healthy growth to start the year. F annie Mae released its Q1 financial statement recently which found the GSE posted a net income of $4.3 billion, after taxes, in Q1. That's up from a $6.5 billion loss and a comprehensive loss of $6.7 billion loss at the end of Q 4 2017. Pretax net revenues in the first quarter were $5.4 billion, and Fannie's overall comprehensive income was $3.9 billion. This, Fannie reported, was "due to the remeasurement of the company's deferred tax assets resulting from enactment of tax legislation during the quarter." The GSE's net worth reflects $3.7 billion received from Treasury in Q1. That's related to Fannie's senior preferred stock purchase agree - ment with Treasury to eliminate the company's net worth deficit as of December 31. Fannie expects to pay a $938 million dividend to Treasury by the end of June. The two primary factors driv - ing the difference between net income in Q1 2018 and net loss in Q 4 2017, according to the report, were a $9.9 billion provision for federal income taxes in Q 4 "that resulted from the enactment of the Tax Cuts and Jobs Act of 2017" and net fair value gains of $1.0 billion in Q1. The latter was primarily driven by gains on the company's mortgage commitment and risk management derivatives. Fannie Mae's President and CEO, Timothy Mayopoulos, reacted optimistically to the com - pany's Q1 numbers. "Our solid first quarter perfor- mance reflects the strength of our underlying business, the benefits of our business model, and our focus on customers," Mayopoulos said. "We continue to drive advances in the housing finance system, providing our custom - ers with reliable, sustainable, and innovative solutions to address America's housing needs." According to the report, Fannie Mae provided approximately $113 billion in liquidity to the single- family mortgage market in Q1 2018 and was (at 42 percent) the largest issuer of single-family mortgage-related securities in the secondary market. The GSE also continued to transfer a portion of the credit risk on single-family mortgages. At the end of Q1, $995 billion in single-family mortgages, a third of loans in the company's single- family conventional guaranty book of business, measured by unpaid principal balance, were covered by a credit risk transfer transaction. Also, Fannie Mae reported pro - viding more than $11 billion in mul- tifamily financing to help finance 154,000 multifamily units in Q1. Examining Reform The Urban Institute delves into the future of GSE reform. N ew research published by the Urban Institute's Housing Finance Policy Center looks at what the current administration will likely do to administratively reform Fannie Mae and Freddie Mac as the time for legislative reforms runs out. It found there were considerable risks on this path including potentially severe disruption of the housing and mortgage markets. The research looked at numerous scenarios that could be played out by the Federal Housing Finance Agency, (FHFA), the regulator and conservator of the GSEs, and an agency that is likely to play a central role in these administrative reforms. The scenarios ranged from reducing the GSEs' footprint and limiting the cross-subsidy to bringing the GSEs out of conservatorship— all moves that would result in scaling back the GSEs' reach or privatizing them. All these moves, the report says could lead to significant disruption to housing and mortgage markets, as well as the broader economy. "Shrinking the share of the market they support will reduce the number of borrowers who re - ceive this subsidized lending," the report said, adding that in most of the scenarios that were evaluated, higher risk borrowers would bear the brunt of the change as they were the ones who received a considerable share of the GSEs' subsidies and cross-subsidies. These high-risk borrowers would "see the lion's share of the increases in cost as the market shifts to full risk-based pricing," the report said. To avoid such a scenario, the report recommended that the FHFA instead, look at expand - ing the GSEs' current credit risk transfer process to more sources of private capital, expand the common securitization program into a more robust market util - ity, and make the GSEs more transparent. If the FHFA took these steps, the report concluded, "it would put the nation into position to transition to a housing finance system in which mortgage credit is as available as it is today but in a way that poses less risk to taxpayers and the economy." These high-risk borrowers would "see the lion's share of the increases in cost as the market shifts to full risk- based pricing."

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