Fannie Mae, Freddie Mac, and FHA is Profitable Again

These past few years, politicians, economists and Wall Street became concerned for Fannie Mae, Freddie Mac, and the Federal Housing Administration. They were anxious about the agencies’ respective ability to stay solvent. The three agencies have been getting high default rates for almost five years, which resulted to large quarterly losses.

Recently, those concerns have improved, as Fannie Mae reported $5.1 billion profits for the second quarter and Freddie Mae reported $3 billion profits for the second quarter as well.

Towards the end of the year 2008, the two agencies got $188 billion in taxpayer funds as a form of assistance. As of now, they have paid back a quarter of that, and if profitable quarters continue, they will be able to repay the loan in full.

One of the things that helped the agencies return to profitability is the improving housing market. Another reason can be better risk management of the two agencies.

In addition to Fannie Mae and Freddie Mac, FHA is also rebuilding their reserves and recapitalizing.

Ever since the first months of 2009, FHA has increased its mortgage insurance premiums on four separate instances. New FHA homeowners located in high-cost areas (e.g. Orange County, California and Loudoun County, Virginia) currently pay as high as 1.5 percent every year to the FHA’s capital reserves.

A few things that helped FHA to keep a positive capital ratio and move toward its target 2 percent reserve ratio include bigger premiums and fewer FHA defaults.  At present, the capital ratio of FHA is around 0.50 percent. Moreover, $1 billion of the $25 billion mortgage services settlement went to FHA’s bottom line.

One huge factor that contributed to Fannie Mae, Freddie Mac, and FHA’s return to profitability is the increase in U.S. homeowners staying current on their respective home loans. In other words, decrease in defaults indicates fewer losses and more profit.

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