Freddie Mac and Fannie Mae each reported out another successful financial quarter today as each continued to reduce their respective distressed loan portfolios, replacing them with later vintage performing loans.  Neither however reported profits at the record levels seen earlier as their portfolios shrink and legal settlements taper off.

Fannie Mae reported net income and comprehensive income of $3.7 billion for the second quarter of 2014 while Freddie Mac's net income was $1.4 billion.  Fannie Mae will pay $3.7 billion in dividends to the U.S. Treasury in September and Freddie Mac will pay $1.9 billion.  Neither of the two government sponsored enterprises (GSEs) will require a draw on their lines of credit with the Treasury Department.

Fannie Mae's net income was down from $5.3 billion in the first quarter and comprehensive income from $5.7 billion. The company posted net interest income of $4.9 billion in the second quarter compared to $4.7 billion in the first and net revenues of $5.3 billion compared to $9.1 billion.   The decline in gross and net income was due primarily to lower income from settlement agreements related to private-label mortgage related securities sold to the company.  The decline was partially offset by an increase to the company's benefit for credit losses due primarily to higher home prices in the second quarter. 

As a result of both the shrinking of the retained mortgage portfolio and the impact of guaranty fee increases, an increasing portion of Fannie Mae's revenues in recent years has been derived from guaranty fees rather than from interest income earned on the company's portfolio assets. The percentage of net interest income derived from guaranty fees on loans underlying Fannie Mae MBS increased to approximately half in the first half of 2014, compared with approximately one-third in the first half of 2013. The company expects that guaranty fees will continue to account for an increasing portion of its revenues.

Net Fair Value Losses were $934 million in the second quarter of 2014, compared with $1.2 billion in the first quarter of 2014. Second quarter 2014 fair value losses were driven primarily by losses on risk management derivatives as a result of a decrease in interest rates.

Fannie Mae's federal income tax rate was 32.3 percent in the second quarter of 2014, resulting in a provision for federal income taxes of $1.8 billion in the second quarter of 2014.

With the expected September dividend payment, Fannie Mae will have paid a total of $130.5 billion in dividends to Treasury in comparison to $116.1 billion in draw requests since 2008. Dividend payments do not offset prior Treasury draws.

Freddie Mac's profitable quarter was the eleventh consecutive one in which it has posted positive earnings.  The second quarter net of $1.4 billion was, however, substantially lower than the $4 billion net in the first quarter of 2014 and the comprehensive income of $1.9 billion was also down from $4.5 billion in the prior quarter.  Net interest income was unchanged from $3.5 billion in the two quarters.

The company said its second quarter results were primarily driven by credit cycle recovery items.  Like Fannie Mae, the company had lower income from legal settlements on private-label securities; $0.4 billion in the second quarter compared to $4.5 billion in the first.  These figures were offset by lower derivative losses of $1.9 billion versus $2.4 billion in the first quarter and by a shift to credit provision income of $0.6 billion from an expense of $0.1 billion in the first quarter.

Freddie Mac's expected September dividend payment to Treasury will bring the total paid since the beginning of conservatorship to $88.2 billion.  The U.S. Treasury continues to hold $72.3 billion in preferred senior stock to secure the company's debt as dividend payments are not permitted to reduce that debt.

Fannie Mae says that 79 percent of its conventional guaranty book of business is now comprised of loans it had purchased or guaranteed since the beginning of 2009.  Twenty-six percent of the "new" loans are home purchase mortgages and 74 percent are refinance loans.  The refinance loans include 14 percent of loans acquired through the Home Affordable Refinance Program (HARP) and 11 percent are loans made through the company's RefiPlus initiative. 

Fifty-six percent of Freddie Mac's single-family credit guarantee portfolio is post 2008 vintage loans with another 21 percent made up HARP and other relief refinance loans.

Fannie Mae's single-family serious delinquency rate has declined each quarter since the first quarter of 2010, and was 2.05 percent as of June 30, 2014, compared with 5.47 percent as of March 31, 2010.  Freddie Mac had a single family serious delinquency rate of 2.07 percent at the end of June, down from 2.79 percent at the same point in 2013, and a multifamily delinquency rate of 0.02 percent.