Great 2013 results, driven by many one-time occurences

CHICAGO—Freddie Mac made a strong showing in last year’s fourth quarter, according to an earnings report it released last week, capping a year of great results for the GSEs. But Chicago-based Fitch Ratings says much of this good news reflects the impact of several one-time events which probably won’t occur in 2014. However, Fitch still expects that the GSEs will continue their profitable ways in the coming year due to increased guarantee fees and improving mortgage credit quality.

Fannie Mae and Freddie Mac had a combined 2013 net income of $133 billion. Their numbers were boosted by deferred tax allowance valuation reversals, RMBS lawsuit settlements, representation and warranty settlements, and an improvement in the housing market which helped drive decreases in loan loss reserves.

“In aggregate, these one-time items represented the majority of 2013 earnings,” Fitch noted. “Most of the GSEs’ comprehensive income was remitted to Treasury through the net worth dividend sweep mechanism.”

And the drivers of future GSE earnings will shift, Fitch added. “The g-fees charged on new loans have roughly doubled over the last two years, and solid origination activity will likely increase their importance in future periods.” But the mandated reductions in GSE on-balance sheet assets will push down net interest income.

“The level of private-label RMBS litigation and R&W settlements over recent months has been very high, and we expect the impact of related gains on GSE results to diminish in 2014,” Fitch concluded. “Still, a number of outstanding legal claims remain, primarily related to private label RMBS, and the cash impact of future settlements, particularly in the first half of the year, could still be a material source of earnings.”