Executive Summary / Key Takeaways

• Fannie Mae, operating under conservatorship, continues to fulfill its mission of providing liquidity and stability to the U.S. housing market by guaranteeing mortgage-backed securities, despite facing challenging market conditions characterized by elevated interest rates and affordability constraints.
• The company demonstrated financial resilience in Q1 2025, reporting $3.7 billion in net income, contributing to a net worth increase to $98.3 billion, primarily through retained earnings, although it remains significantly undercapitalized relative to regulatory requirements not currently binding under conservatorship.
• While single-family acquisition volumes remain low due to market dynamics, the credit profile of the book remains strong, and the company is actively managing credit risk through loss mitigation and credit risk transfer programs.
• The multifamily segment faces headwinds from declining property values and increased serious delinquencies, particularly in adjustable-rate loan portfolios, necessitating active problem loan management and risk sharing.
• Fannie Mae is leveraging technology and strategic initiatives, such as using rent payment data and developing social bonds, to address housing affordability challenges and attract capital to underserved markets, reinforcing its mission-driven role within the competitive landscape.

A Cornerstone Under Conservatorship: Fannie Mae's Enduring Role

Federal National Mortgage Association, widely known as Fannie Mae, stands as a foundational pillar of the U U.S. housing finance system. Chartered by Congress, its core mission is to provide essential liquidity and stability to the residential mortgage market and promote access to mortgage credit across the nation. Unlike traditional lenders, Fannie Mae primarily achieves this by purchasing mortgage loans originated by lenders, pooling them into trusts, and issuing guaranteed mortgage-backed securities (MBS) to global investors. This guaranty, for which it receives a fee, is the bedrock of its business model, transferring credit risk from lenders and making mortgage capital more readily available.

Fannie Mae's extensive history, spanning over 85 years since its founding around 1938, has been profoundly shaped by its role as a government-sponsored enterprise (GSE). A pivotal moment occurred in 2008 when the company was placed into conservatorship under the Federal Housing Finance Agency (FHFA), a status it maintains today. This conservatorship, alongside agreements with the U.S. Treasury, significantly impacts its operations, strategic flexibility, and stockholder rights, creating a unique operating environment distinct from fully private financial institutions.

Within the broader financial landscape, Fannie Mae operates alongside its fellow GSE, Freddie Mac (FMCC), as primary competitors in the mortgage securitization space. They collectively dominate the agency MBS market, offering liquidity and risk transfer solutions that are critical to the functioning of the U.S. mortgage market. Beyond the GSEs, large commercial banks like JPMorgan Chase (JPM), Wells Fargo (WFC), and Bank of America (BAC) also participate in mortgage origination, servicing, and hold significant mortgage assets, though their business models are more diversified. Competition among these players is influenced by factors such as pricing, operational efficiency, regulatory requirements, and the ability to innovate in product offerings and risk management. Fannie Mae's government backing provides a distinct advantage in funding costs, enabling it to offer competitive pricing for its guaranty. However, it faces competitive pressures from the operational efficiencies and technological advancements of large banks and the specific strengths of Freddie Mac in certain market segments.

Fannie Mae is actively leveraging technology to enhance its operations and fulfill its mission. The company utilizes sophisticated models and analytics to modernize the home valuation process, offering less costly appraisal waivers and alternatives. This capability saved low to moderate income borrowers an estimated $52 million in upfront costs in 2023. Furthermore, Fannie Mae is integrating the use of rent payment data in both its single-family and multifamily businesses to help consumers build and improve credit scores, with nearly 28,000 renters establishing scores and others seeing an average increase of 35 points in 2023. These technological applications contribute to Fannie Mae's competitive positioning by reducing costs for borrowers and lenders, expanding access to credit for underserved populations, and enhancing its risk assessment capabilities. The strategic intent behind these initiatives is to make the housing finance system more equitable and efficient, reinforcing Fannie Mae's mission while adapting to evolving market needs.

Performance Amidst Market Crosscurrents

Fannie Mae's financial performance in the first quarter of 2025 reflects the ongoing adjustments to a dynamic economic and housing market environment. The company reported net income of $3.7 billion, a decrease of $659 million compared to the first quarter of 2024. This decline was primarily attributable to a decrease in fair value gains and a shift from a benefit for credit losses in the prior year to a provision for credit losses in the current quarter. Net revenues remained relatively flat year-over-year at $7.1 billion, as lower net interest income from the company's portfolios was largely offset by higher income from base guaranty fees and lower expense from hedge accounting. The decrease in portfolio net interest income was driven by a higher average balance and higher average rates on long-term funding debt.

The provision for credit losses of $24 million in Q1 2025, compared to a $180 million benefit in Q1 2024, highlights the sensitivity of earnings to macroeconomic conditions and forecasts. The Q1 2025 provision in the single-family segment reflected the impact of recent economic uncertainty, which increased estimated credit losses, partially offset by a benefit from improvements in actual and forecasted home price growth. In contrast, the Q1 2024 benefit was primarily driven by stronger-than-expected forecasted home price appreciation. The multifamily segment's provision for credit losses was neutral in Q1 2025, but the allowance includes a component for economic uncertainty related to property values. The Q1 2024 multifamily provision was driven by continued declines in actual and projected property values and increases in interest rates.

Fair value gains, net, decreased significantly from $480 million in Q1 2024 to $123 million in Q1 2025. The gains in Q1 2025 were primarily from fixed-rate trading securities, largely offset by losses on long-term debt, mortgage commitment derivatives, and risk management derivatives, all influenced by declining interest rates during the quarter. The prior year's gains were driven by increases in interest rates. The balance of unamortized deferred guaranty fees decreased in Q1 2025, mainly due to the amortization of existing fees and net discounts on newly issued MBS debt resulting from price declines.

Operationally, single-family conventional loan acquisitions remained at low levels, totaling $63.6 billion in Q1 2025, similar to $62.3 billion in Q1 2024. This reflects continued housing affordability constraints and limited supply, which pressured purchase volumes, and high mortgage rates relative to existing loan rates, resulting in low refinancing activity. The credit profile of new acquisitions remains strong, with a weighted average original LTV of 77% and a weighted average FICO of 757 in Q1 2025. The single-family serious delinquency rate remained flat at a historically low 0.56% as of March 31, 2025. In support of loss mitigation, Fannie Mae purchased $3.6 billion of delinquent loans from its single-family MBS trusts in Q1 2025.

The multifamily business saw acquisitions increase to $11.5 billion in Q1 2025 from $10.1 billion in Q1 2024, though still low compared to historical averages. The multifamily guaranty book of business grew to $504.5 billion as of March 31, 2025. The multifamily serious delinquency rate increased to 0.63% as of March 31, 2025, from 0.57% at year-end 2024, with new delinquencies primarily in fixed-rate conventional loans. The criticized loan population remains elevated, largely due to adjustable-rate mortgages.

Liquidity remained strong, with the company in compliance with all liquidity requirements. The corporate liquidity portfolio increased, driven by reinvestment of proceeds from MBS sales. Total assets stood at $4.35 trillion as of March 31, 2025. Net worth increased by $3.7 billion in Q1 2025 to $98.3 billion, primarily through retained earnings.

However, under the enterprise regulatory capital framework, Fannie Mae had an available capital deficit of $33.0 billion and a total capital shortfall of $220.0 billion including buffers as of March 31, 2025. The aggregate liquidation preference of the senior preferred stock held by Treasury increased to $216.2 billion and is set to increase further to $219.8 billion by June 30, 2025, reflecting the increase in net worth. The remaining Treasury funding commitment was $113.9 billion.

Outlook, Risks, and Strategic Direction

Looking ahead, Fannie Mae's outlook is shaped by expectations of continued, albeit slower, GDP growth in 2025 and a modest increase in the unemployment rate. The housing market is expected to see national home price growth of 4.1% in 2025, following an estimated 5.8% in 2024. Single-family mortgage originations are forecasted to increase from $1.5 trillion in 2023 to approximately $1.7 trillion in 2024, with purchases dominating volume. The multifamily market faces persistent challenges, with property values having declined significantly from their peak (down 18% by Q1 2025 from Q2 2022 peak) and transaction volumes remaining subdued. Elevated new construction is expected to push vacancy rates higher, potentially reaching 6.25% in 2025. While rent growth is forecasted in the 2.00% to 2.50% range for 2025, this is contingent on continued job growth; a slowdown could keep rent growth subdued.

Fannie Mae continues to pursue strategic initiatives aligned with its mission. Efforts to address affordability and access include using rent payment data to help consumers build credit and modernizing the valuation process. The company is also exploring capital markets innovations like single-family and multifamily social bonds to attract investment to affordable housing and underserved markets. Risk management remains paramount, with ongoing efforts in credit risk transfer through programs like CAS, CIRT, MCIRT, and MCAS, as well as the foundational DUS program for multifamily. These programs transfer a portion of the credit risk to the private market, enhancing the company's stability.

Key risks to the investment thesis include the inherent uncertainty of macroeconomic conditions, which can significantly impact credit losses and fair value measurements. Changes in interest rates and home prices/property values directly affect the allowance for loan losses and the value of financial instruments. The multifamily segment faces specific risks from elevated interest rates impacting borrowers' ability to refinance balloon payments and from potential stress in adjustable-rate loan portfolios. Counterparty risk with mortgage insurers and servicers, particularly the increasing single-family servicing concentration resulting from industry consolidation, also warrants close monitoring. Furthermore, the ongoing conservatorship imposes structural limitations, including a material weakness in disclosure controls related to information known only to FHFA, and the outcome of ongoing litigation challenging the net worth sweep remains uncertain and under appeal.

Conclusion

Fannie Mae's first quarter 2025 results underscore its continued operational stability and financial resilience in a challenging housing market. Despite facing headwinds from elevated interest rates, affordability constraints, and specific pressures in the multifamily sector, the company generated solid net income and increased its net worth, primarily through retained earnings. Its core business model of providing liquidity through MBS guaranties remains essential to the U.S. housing finance system.

The company's strategic focus on risk management, coupled with targeted initiatives leveraging technology to expand access and address affordability, positions it to navigate the current environment and fulfill its mission. While significant risks persist, notably those tied to macroeconomic volatility, multifamily credit performance, and the unique complexities of its conservatorship status and capital position, Fannie Mae's foundational role and ongoing efforts to enhance its operations and risk transfer capabilities provide a degree of stability. The ability to continue building capital, even under the constraints of the senior preferred stock agreement, strengthens its capacity to absorb potential losses and remain a reliable source of housing finance.