Federal National Mortgage Association (PNK:FNMA) Q4 2023 Earnings Call Transcript

Federal National Mortgage Association (PNK:FNMA) Q4 2023 Earnings Call Transcript February 15, 2024

Federal National Mortgage Association isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good day and welcome to the Fannie Mae Fourth Quarter and Full-Year 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 fourth quarter and full-year 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’s 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 risk factors and forward-looking statements sections in the company’s 2023 Form 10-K filed today 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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. I’ll begin by spending a few minutes on the economic environment, and then we’ll turn to our financial admission performance for 2023. After that, our Chief Financial Officer, Chryssa Halley, will discuss our full-year and fourth quarter results in more detail. Let me begin with the economic environment. The economy held up much stronger in 2023 than we anticipated at the outset of the year. GDP grew at an annual rate of 3.1%; inflation came in at 3.2%, down from 7.1% in 2022, in part due to the 100 basis points increase in the Fed funds rate last year. This increase in rates had a direct effect on housing, our business, and the people we serve. 30-year mortgage rates reached a 23-year high of nearly 8% in October 2023, an average 6.8% over the full-year, that was up 1.5 percentage points from the prior year.

The housing market is much different than it was just a few years ago. Back then, borrowers were able to access financing at historically low mortgage rates. Many of these borrowers sat tight in their homes, thanks to the low rates they locked in during 2020 and 2021. This lock in effect contributed to fewer homes available for sale. Despite this backdrop, home ownership is still in demand by many consumers and supply has not kept pace. One outcome of this is that home prices in 2023 were more resilient than expected. Single-family home prices increased by an estimated 7.1%. You will hear these higher home prices as a theme in our annual results. In addition, overall single-family mortgage originations remained low at $1.5 trillion, a 37% decline year-on-year.

The multifamily sector also faced challenges. Property values declined, and the market saw significant new units in some areas, while in other areas supply continued to be constrained. At a national level, 2023 rent growth fell and we expect that it turned negative in the fourth quarter. Even so, affordability continues to remain a challenge for renters in many parts of the country. Overall, multifamily mortgage originations declined substantially year-on-year to an estimated range of $255 billion to $275 billion, compared to $480 billion in 2022. Turning to our financial results, we reported $17.4 billion in net income in 2023, compared to $12.9 billion of net income in 2022; $3.9 billion of this was attributable to the fourth quarter. The strength in home prices throughout the year had a direct impact on our earnings, largely due to the release of credit reserves that reflected higher actual and forecasted home prices.

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Q&A Session

We continue to manage our capital shortfall through retained earnings and our credit risk transfer program. Our net worth increased to nearly $78 billion at the end of the year. This increased bolsters our financial stability and enables us to continue being a reliable source of mortgage credit for America’s homeowners and renters. In 2023, working with our partners in housing finance, we provided $369 billion in liquidity, this helped 1.5 million households buy, refinance, or rent a home. This included approximately 189,000 low and very low income households. It also included 482,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of area median income. And we helped over 380,000 first-time home buyers to purchase a home.

In all this work, we are guided by our mission. Let me share some examples of how we brought our mission to life in 2023, focusing on two key obstacles that many home buyers face, insufficient credit and upfront costs. First, regarding insufficient credit, we continued to use innovative ways to help the housing system see consumers with no or thin credit files. We are using on-time rent payments to help renters build and improve their credit scores. Through the end of last year, according to our vendors, we helped nearly 28,000 renters establish credit scores, and participating renters, who already had a credit score and saw an improvement had an average increase of 35 points. In our flagship automated underwriting system, Desktop Underwriter, we’ve made it possible for lenders to consider on-time rent payments and credit evaluations or to assess the cash flow and credit worthiness of borrowers, who don’t have a credit score.

As to lowering upfront cost of housing, we continue to modernize the home valuation process by using models and analytics that allow us to offer less costly appraisal waivers and alternatives. Through these options, low to moderate income borrowers saved an estimated $52 million in upfront costs in 2023. We’re also giving lenders the option to use an attorney opinion letter instead of a traditional lender’s title insurance policy on some transactions. And we increase the allowable loan to value ratios for 2 unit to 4 unit properties. This reduces upfront cost for these property types and preserves affordable rental housing. While we still have a lot of work to do to make the housing system work for everyone, we’re very proud with the progress we have made so far.

As I wrap up, 2023 marked Fannie Mae’s 85th anniversary. As of September 30, we owned or guaranteed approximately one in four single-family mortgages and about one-fifth of multifamily mortgage debt outstanding in the United States. We take our responsibility seriously. Our mission guides us. The efforts we’ve taken to strengthen our business and our strong risk management focus are the foundation that allows us to deliver on our mission. As we move into 2024, we remain dedicated to expanding housing opportunities in ways that are responsible and sustainable. Already this year, we’ve announced a $2,500 credit to eligible home-ready borrowers, who made less than or equal to 50% of area median income, helping to address upfront costs for very low-income borrowers.

We also announced enhanced single-family MBS disclosures, the Mission Index. This index provides insights into our mission activity, allowing MBS investors to allocate their capital in support of affordable housing and underserved borrowers and markets. Finally, before I turn it over to Chryssa, I want to thank our employees for making all that we did in 2023 possible. The work they do matters. The work matters to the people who live in the homes and apartments we help finance. It matters to communities throughout the nation, and it matters to our housing partners. Now, Chryssa will discuss our full-year and fourth quarter financial results.

Chryssa Halley: Thank you, Priscilla, and good morning. As Priscilla mentioned, we reported $17.4 billion in net income in 2023, compared to $12.9 billion in 2022. Net revenues remain strong with $28.8 billion in net interest income, thanks mainly to healthy guarantee fee income. This is slightly lower than 2022’s net interest income. While our base guarantee fee income grew slightly in 2023, higher interest rates during the year drove a decline in deferred guarantee fee income due to lower refinance activity. This was offset by an increase in income due to higher yields on securities in our corporate liquidity portfolio, also driven by the higher interest rate environment. We recognized a $1.7 billion benefit for credit losses in 2023, primarily due to stronger-than-expected actual and forecasted home prices.

Conversely, in 2022, we recorded an over $6 billion provision for credit losses. For the fourth quarter of 2023, net income was $3.9 billion, driven by strong net interest income from guarantee fees and our corporate liquidity portfolio. Now, let me turn to our segments. Starting with single-family, we reported $14.9 billion in net income in 2023, an increase of $4.1 billion, compared to 2022. This increase was driven by the release of credit reserves in 2023, while those reserves increased substantially in the prior year. Our reserve release was mainly due to an improvement in actual and forecasted home prices. We acquired $316 billion of single-family loans last year, a nearly 50% decrease, compared to 2022 and our lowest volume since 2000.

Higher mortgage rates in 2023 drove refinance volumes to their lowest levels since before 2000. In fact, our percentage of acquisitions that were purchased mortgages last year grew to 86%. Our overall single-family book of business remains strong as of year-end, with a weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 753. Nearly 85% of our single-family book as of year-end had interest rates below 5%. Even if interest rates decline meaningfully, most of the borrowers whose loans are in our single-family book still would not be incentivized to refinance. Fixed-rate mortgage loans made up 99% of our single-family book as of the end of last year. Fixed-rate loans protect mortgage borrowers against interest rate shocks on their mortgage payments.