NEW YORK--(BUSINESS WIRE)--Fannie Mae and Freddie Mac's first quarter results continued to benefit from large litigation settlements, while core profitability declined as their balance sheets continued to shrink. Fitch Ratings believes the GSEs should return to a more steady level of earnings during the remainder of 2014.
Net interest income (NII) for both companies declined as their balance sheets continued to shrink. Freddie Mac's NII declined 7.2% from the prior quarter and approximately 18% from 1Q'13. The decline in Fannie Mae's NII was more modest at 2.3% on a linked-quarter basis and 25% year-over-year. Fitch expects the downward trend in core profitability to persist for the remainder of the year, despite higher guaranty fees charged on new business, which are included in NII.
Single-family business volumes fell sharply, as refinancing activity stalled further amid higher interest rates. During the first quarter, Fannie and Freddie reported a combined decline in new MBS issuance of 30% and 63%, compared to the linked quarter and 1Q'13, respectively. A decrease in business volumes does not have an immediate impact on GSEs' profitability.
Profits were bolstered by a number of large settlements with financial institutions pertaining to private-label securities. In aggregate, settlements represented $6.2 billion, or roughly 61% of comprehensive income for the quarter. A number of large cases were settled during the quarter, including Bank of America, which was the largest one to-date. The pace of legal settlements will slow dramatically in 2014, as most of the institutions with the largest exposure have already paid.
Additional information is available at 'www.fitchratings.com'.