Fannie and Freddie’s (FNMA, Financial)(FMCC, Financial) underlying earnings in their core mortgage guarantee businesses declined modestly in the first quarter, reflecting lower refinancing volumes driven by a large increase in interest rates in the fourth quarter of 2016. Despite this short-term, cyclical headwind, we believe that their long-term earnings power will continue to grow due to three factors: (1) an increase in guarantee fees as the fees on new mortgages exceed the average fees on the existing portfolio, (2) growth of the total guarantee portfolio along with mortgage originations, and (3) lower credit losses as the portfolio’s credit quality continues to improve. Fannie and Freddie’s non-core investment portfolio continued to shrink in the first quarter, resulting in a more profitable and lower-risk business model.
Housing finance reform is a top priority for both the new administration and Congress. Importantly, key constituents in the new administration, including Treasury Secretary Steven Mnuchin, have a thorough understanding of the critical role that Fannie and Freddie play in the health of the nation’s housing finance system. In contrast to vintage 2013 proposals that sought to replace Fannie and Freddie or wind them down, several proposals released over the last month, most recently a white paper from the Independent Community Bankers of America, recognize that preserving a reformed and restructured Fannie and Freddie is the only way to ensure the continued health of the secondary mortgage market, especially for a large number of community banks that are critical sources of financing for many homeowners.
From Bill Ackman (Trades, Portfolio)'s first quarter 2017 shareholder letter.
