Federal National Mortgage Association (PNK:FNMA) Q2 2023 Earnings Call Transcript August 1, 2023

Operator: Good day, and welcome to the Fannie Mae Second Quarter 2023 Financial Results Conference Call. At this time, I will now turn it over to your host, Pete Bakel, Fannie Mae’s Director of External Communications.

Pete Bakel: Hello, and thank you all for joining today’s conference call to discuss Fannie Mae’s second quarter 2023 financial results. Please note this call includes forward-looking statements, including statements about Fannie Mae’s expectations related to economic and housing market conditions, the future performance of the company and its book of business, and the company’s business plans and their impact. Future events may turn out to be very different from these statements. The Forward-looking Statements section in the company’s Second Quarter 2023 Form 10-Q, filed today, and the Risk Factors and Forward-Looking Statements sections in the company’s 2022 Form 10-K, filed on February 14, 2023, describe factors that may lead to different results.

A recording of this call may be posted on the company’s website. We ask that you do not record this call for public broadcast, and that you do not publish any full transcript. I’d now like to turn the call over to Fannie Mae Chief Executive Officer, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Chryssa C. Halley.

Priscilla Almodovar: Welcome, and thank you for joining us today. Let me begin by spending a few minutes on the economic environment before turning to our performance in the second quarter of 2023. After that, our Chief Financial Officer, Chryssa Halley, will discuss our second quarter results and current outlook for the economy. Economic data was mixed in the second quarter, though GDP growth was stronger than anticipated. The Federal Reserve continued tightening monetary policy and raised their target Fed Funds rate twice in the past few months. One of the focal points in their decision-making has been how much housing contributes to inflation. And while overall inflation has slowed, housing’s contribution to inflation has remained elevated.

The resiliency of the housing market continued to surprise many of us, especially since mortgage rates and high home prices continue to weigh on housing affordability. The lack of housing supply is a major contributing factor. Many current homeowners are reluctant to sell their existing homes and give up their low mortgage rates they locked in in 2020 or 2021. Earlier this month, the National Association of REALTORS reported that there were 1.08 million existing homes for sale last month compared with 1.92 million in June 2019. This lack of existing home supply drove stronger-than-expected home price growth. In fact, we estimate that single-family home prices rose about 5% during the first six months of the year, while many of us were anticipating a decline.

Single-family mortgage origination volumes in the overall market were about 35% lower than the same time last year, despite the estimated $120 billion increase quarter-on-quarter due to the typical spring homebuying season. It continues to be a tough market for our lender counterparties, something we are monitoring closely. Thanks to the dedication of our leadership and teams across the company, we continued to support an unprecedented housing market while generating strong financial results and effectively managing risk. Now, turning to our second quarter financial performance. The strength in home prices during the quarter had a direct impact on our earnings, largely due to the decrease in our single-family allowance that Chryssa will talk about.

We reported $5 billion in net income and $7.1 billion in net revenues. As a result, through retained earnings, we continued to build our net worth, which reached $69 billion as of the end of June. I’m proud that through our efforts, we provided $104 billion of liquidity to the single-family and multi-family markets. In doing so, we helped borrowers obtain mortgage credit for approximately 420,000 home purchases, refinances, and rental units. This included approximately 139,000 units of multifamily rental housing, a significant majority of which were affordable to households earning at or below 120% of area median income. We also helped 108,000 first-time homebuyers purchase a home. Despite challenges with housing affordability and supply, consumers’ homeownership aspirations remain high.

And while Fannie Mae cannot directly control these factors, we are working to help address housing challenges consumers face, especially those that disproportionately burden underserved renters and homeowners. And we’re doing so safely and soundly. Let me touch on a few examples. First, we advanced our mortgage pricing model. The new construct improves support for traditionally underserved borrowers while further aligning our pricing model to our capital requirements. Second, we continued to support Special Purpose Credit Programs, currently active in six markets, that are expected to make loan qualification easier for underserved borrowers. And third, we introduced a new option for lenders to verify a property’s market value and eligibility as part of our journey to make the home valuation process more effective, efficient, and unbiased.

Now, our role is not just about helping consumers get into a home, it is also about ensuring they remain stably housed. Housing stability is key to well-being, for both individuals and communities. On that note, I’m gratified that as of the end of June, we stood at less than 100,000 seriously delinquent single-family loans, coming a long way from the over 1 million seriously delinquent loans we saw in our single-family book in February of 2010. In addition to market factors, this is a testament to the enhanced underwriting policies, servicing options, and support we give to lenders and borrowers. This includes things like free counseling assistance to borrowers and renters impacted by natural disasters and free foreclosure prevention assistance to borrowers in distress.

We remain focused on continuing to support renters and homeowners as they face the uncertainties of the current market. You know, this fall marks 15 years since Fannie Mae was placed in conservatorship. A lot has changed since that time. Today, Fannie Mae has been transformed. Fannie Mae is safer and stronger, thanks to years of work to improve the resiliency of our business and our steadfast focus on strong risk management. Because of this, we continue to be a stabilizing force in the market and to deliver on our mission, like we did through the COVID-19 pandemic, and how we’re doing now through this challenging economic cycle. We are committed to being a reliable source of liquidity and stability to the housing finance system in the United States.

Now, I’ll turn it over to Chryssa to discuss our second quarter financial results.

Chryssa Halley: Thank you, Priscilla. And good morning. As Priscilla mentioned, we reported $5 billion in net income in the second quarter, a $1.2 billion increase compared to the first quarter of this year. Our second quarter net revenues remained strong at $7.1 billion, thanks to healthy guaranty fee income. This is relatively flat compared to the prior quarter. A $1.3 billion benefit for credit losses was the primary driver of the quarter-over-quarter growth in net income. This was mainly driven by stronger-than-expected actual home price growth during the quarter of 3.6% that resulted in a decrease in our single-family allowance. Let me now turn to a few highlights of our Single-Family business. Despite higher mortgage interest rates quarter-over-quarter, our single-family acquisition volumes increased by 32%, to $89 billion in the second quarter compared to $68 billion in the first quarter.

However, this was still 48% lower than the $172 billion of single-family loans we acquired in the second quarter of last year. Not surprisingly, given the rate environment, the purchase share of our acquisitions reached 86% in the second quarter, a level we have not seen for at least 23 years. Our overall single-family book of business remained strong, with a weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 752. Our single-family serious delinquency rate remained at historically low levels, and as of June 30, stood at 55 basis points. We continue to manage credit risk through credit risk transfer transactions. In the second quarter, we transferred a portion of the credit risk on approximately $116 billion of mortgages through our single-family credit risk transfer programs.

Shifting to our Multifamily business, we acquired $15.1 billion of multifamily loans in the second quarter, bringing our acquisitions through June 30 to $25 billion. Our volume cap for the year is $75 billion. The overall credit profile of our multifamily book remains strong, with a weighted-average original loan-to-value ratio of 64% and a weighted-average debt service coverage ratio of 2.1 times. However, our multifamily seniors housing loans, especially those that are adjustable-rate mortgages, remain stressed. Seniors housing loans represent 4% of our multifamily book as of the end of the second quarter, but nearly 40% of these loans had a debt service coverage ratio below 1.0 as of June 30, indicating a heightened risk of default. We recorded a $152 million provision for credit losses in the second quarter in our multifamily book, primarily due to decreases in estimated property values seen in the overall multifamily sector following years of strong growth.

Our multifamily serious delinquency rate increased slightly to 37 basis points as of the end of June, up from 35 basis points at the end of March. Our primary way to share risk on our multifamily book is through our unique DUS risk-sharing model, where originating lenders typically retain approximately one-third of the credit risk on loans we acquire. In addition, in April of this year, we closed a multifamily credit insurance risk transfer transaction, transferring a portion of risk to diversified insurers and reinsurers. Before we close out, I’ll touch on our current economic outlook. The economy has remained more resilient than we expected earlier in the year, but we believe it is still on a decelerating path, and additional drags are likely forthcoming.

While noting the probability of a soft landing may have increased of late, our Economic and Strategic Research Group expects the economy will enter a modest recession in the fourth quarter of this year or the first quarter of next year. The full effects of tighter monetary policy and tightening credit conditions to date have yet to be fully felt in the real economy and on consumers, and additional banking stress remains a possibility. Given current housing demand and the lack of existing homes for sale, we expect strength in new home sales and construction will support the overall economy as it exits a modest recession. We currently forecast the 30-year fixed rate mortgage rate will average 6.6% for the year. When we spoke last quarter, we anticipated single-family home price declines on a national basis in 2023.

However, given strong home price growth in the first half of the year, we now project national home price growth of 3.9% for the full year. We continue to expect regional variation in home price changes. Our expectations are based on many assumptions, and our actual results could differ materially from our current expectations. As a reminder, we make available on our webpages a financial supplement with today’s filing that provides additional insights into our business. Thank you for joining us today.

Operator: Thank you, everyone. That concludes today’s call. You may disconnect.

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