Federal Home Loan Mortgage - Earnings Call - Q1 2025

Executive Summary

• Net revenues of $5.85B and net income of $2.79B; consolidated YoY growth modest (+2% revenues, +1% net income) while sequentially down vs Q4 on lower non-interest income and higher credit loss provision. EPS to common was -$0.01 due to senior preferred allocations exceeding net income, despite strong operating profit.
• Revenue materially beat Wall Street consensus ($5.85B vs $5.16B), while EPS was a slight miss (consensus $0.00 vs -$0.01); strength was driven by higher net interest income, offset by weaker Multifamily non-interest income and Single-Family reserve build.
• Single-Family delivered a robust quarter: net income $2.3B (+16% YoY), new business activity $78B (+26% YoY), and credit enhancement coverage at 62%; serious delinquencies remained low at 0.59%.
• Multifamily softened: net revenues $0.93B (-27% YoY), net income $0.53B (-35% YoY), and delinquency rose to 0.46% driven by floating-rate loans; fully guaranteed securitizations increased and portfolio guarantee fee rate rose to 52 bps.
• Catalysts: FHFA-led operational streamlining expected to lower G&A and support affordability; management signaled increased technology investment and machine learning automation in underwriting to reduce origination costs and cycle times.

What Went Well and What Went Wrong

What Went Well

• Single-Family momentum: net income $2.3B (+$316M YoY), net revenues $4.9B (+10% YoY); new business activity $78B (+$16B YoY) driven by expanded market coverage, higher conforming limits, and HPA.
• Credit enhancement strength: 62% of Single-Family portfolio and 93% of Multifamily portfolio covered, limiting loss exposure; 98% of delinquent Multifamily loans had credit enhancement.
• Management tone on efficiency: “We expect the savings associated with FHFA's new direction to reduce Freddie Mac's general and administrative expenses in 2025 and beyond... enable Freddie Mac to invest more in critical technology”.

What Went Wrong

• Multifamily pressure: net revenues fell to $0.93B (-$0.35B YoY) and net income to $0.53B (-$0.29B YoY), primarily from lower held-for-sale purchase/securitization revenues, interest-rate risk management impacts, and less favorable fair value changes.
• Higher credit loss provision: consolidated provision rose to $0.28B vs $0.18B in 1Q24, driven by Single-Family reserve build on new acquisitions; Single-Family provision was $0.23B vs $0.12B in 1Q24.
• Delinquency uptick: Multifamily delinquency rate increased to 0.46% (vs 0.34% a year ago), tied to floating-rate and small balance loans in their floating period; Single-Family serious delinquency rose YoY to 0.59% (flat QoQ) with lingering hurricane impacts.

Transcript

Speaker 1

Good morning, and thank you for joining us for a presentation of Freddie Mac's first quarter 2025 financial results. I'm Jeff Markowitz, Senior Vice President and Chief External Affairs Officer. We're joined today by Executive Vice President and Chief Financial Officer, Jim Whitlinger. Before we begin today, we'd like to point out that during the call, Mr. Whitlinger may make forward-looking statements based on assumptions about the company's key business drivers and other factors. Changes in these factors could cause the company's actual results to materially vary from its expectations. A description of these factors can be found in the company's quarterly report on Form 10Q filed today. You will find the 10Q earnings press release and related materials posted on the investor relations section of freddiemac.com. This call is recorded, and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcast or transcribed.

With that, I'll turn the call over to our CFO, Jim Whitlinger.

Speaker 0

Good morning, and thank you for joining our call to review Freddie Mac's first quarter performance. Let's start with the bottom line. Freddie Mac delivered a solid performance, earning $2.8 billion of net income in the first quarter, driving the company's net worth to $62 billion. We helped 313,000 families across the nation buy, rent, or refinance a home in the quarter, with 52% of our single-family loan purchases supporting first-time home buyers and 92% of the eligible rental units financed affordable to middle-income renters who form the backbone of our communities. Our commitment to our mission is unwavering and will only improve as we work with Director of U.S. Federal Housing, Bill Poultey, to streamline our operations by stripping away unnecessary bureaucracy and eliminating non-essential activities.

I'll talk a little more about that and what it means for Freddie Mac before I conclude today's call, so let's get right to the financials. As I noted this morning, we reported first quarter 2025 net income of $2.8 billion, an increase of $28 million, or 1% year-over-year. This increase was primarily driven by higher net interest income from continued mortgage portfolio growth and lower funding costs, partially offset by lower yields on short-term investments. Our first quarter net interest income was $5.1 billion, up $343 million, or 7% year-over-year. The increase was primarily driven by continued mortgage portfolio growth in single-family and an increase in the volume of fully guaranteed securitizations in multi-family. Non-interest income for the first quarter was $750 million, a decline of $248 million, or 25% lower from the prior year quarter. This was primarily due to a decrease in net investment gains in multi-family.

Non-interest expense declined $34 million, or 2% year-over-year, primarily due to lower credit enhancement expenses driven by lower volume of cumulative credit risk transfer transactions. Our provision for credit losses was $280 million for this quarter, primarily driven by a credit reserve built in single-family attributable to new acquisitions. Turning to our individual business segments, the single-family segment reported net income of $2.3 billion for the quarter, up $316 million, or 16% year-over-year. Single-family net revenues of $4.9 billion increased 10% from the prior year quarter. This increase was primarily driven by a 6% increase in our net interest income, which benefited from continued mortgage portfolio growth. Our single-family mortgage portfolio at the end of the quarter was $3.1 trillion, up 2% year-over-year. Our provision for single-family credit losses was an expense of $228 million this quarter, primarily due to credit reserve build for new acquisitions.

The provision in the prior year quarter was $120 million, which was primarily attributable to new acquisitions and increasing mortgage interest rates. Our current house price forecast assumes an increase of 4.2% over the next 12 months and 2.8% over the subsequent 12 months. This is a change from our prior forecast at the end of last quarter, which assumed 2.7% and 3.3% growth over the next 12 and subsequent 12 months, respectively. The single-family allowance for credit losses coverage ratio at the end of this quarter was 21 basis points, unchanged from last quarter and up 1 basis point year-over-year. New business activity totaled $78 billion this quarter, up from $62 billion in the first quarter of 2024. Both home purchase and refinance activity increased due to higher market coverage and conforming loan limits, as well as house price appreciation in recent quarters.

Refinance activity accounted for 21% of our total new business activity this quarter, up from 15% in the same quarter last year, as we saw mortgage rates come down throughout the quarter. The 30-year mortgage rate at the end of the quarter was 6.65%, down from 6.85% at the end of the fourth quarter of 2024 and from 6.79% at the end of the first quarter of 2024. First-time home buyers represented 52% of our total new business activity, or 81,000 households in the first quarter. The average estimated guarantee fee charged on new business was 54 basis points, while the weighted average original loan to value on new purchases was 77%, and the weighted average original credit score was 756.

Credit characteristics of our single-family mortgage portfolio remained strong as well, with the weighted average current loan to value ratio at 52% and the weighted average current credit score at 754. At the end of the quarter, 62% of our single-family mortgage portfolio had some form of credit enhancement. The single-family serious delinquency rate remained low at 59 basis points, unchanged from the prior quarter, and up 7 basis points from the prior year quarter. The year-over-year increase was primarily due to a higher serious delinquency rate for loans originated during and after 2022, as well as lingering impacts from hurricanes that occurred late in 2024. On a related note, in the first quarter, we helped approximately 25,000 families remain in their homes through loan workouts. Moving on to multi-family, the segment reported net income of $533 million, which is down $288 million, or 35% from the prior year quarter.

This decrease was primarily driven by lower non-interest income of $585 million, which decreased $427 million from the prior year quarter. It also was driven by lower revenues from held-for-sale loan purchases and securitization activities, impacts from interest rate management activities, and less favorable fair value changes from prepayment rates. Net interest income of $349 million was up 29% year-over-year, primarily driven by an increase in the volume of fully guaranteed securitizations. The multi-family provision for credit losses was an expense of $52 million this quarter versus $61 million in the prior year quarter. Our multi-family new business activity was $10 billion for the first quarter, up $1 billion from a year ago. Our multi-family business provided financing for 89,000 multi-family rental units in the quarter, with 66% of eligible rental units affordable to low-income families.

Also, in the first quarter, we securitized $16 billion of multi-family loans, $5 billion more than in the prior year quarter. Fully guaranteed securitizations represented 56% of total securitizations, up from 36% in the first quarter 2024. The average guarantee fee on our total guarantee portfolio increased 5 basis points year-over-year to 52 basis points. Our multi-family mortgage portfolio increased 5% year-over-year to $467 billion. The multi-family delinquency rate at the end of the quarter was 46 basis points. This was up 12 basis points from 34 basis points at the end of March 2024, and up 6 basis points from the fourth quarter of 2024. The year-over-year increase in the delinquency rate was primarily driven by increased delinquencies in our floating-rate loans, including small balance loans that are in their floating-rate period. 98% of these delinquent loans had credit enhancement coverage at the end of the quarter.

At the multi-family mortgage portfolio level, our credit enhancement coverage was 93%. On the capital front, our net worth increased to $62.4 billion at the end of the quarter, representing a 24% increase year-over-year. Let me conclude by noting that many of you are closely following the announcements and orders issued by Director Poultey and what those mean for Freddie Mac. Briefly, Director Poultey has helped us streamline our business and harness the productivity of thousands of Freddie Mac employees now in the office full-time. He has eliminated activities not central to Freddie Mac's mission, as well as requirements that make it more expensive to finance a loan, but which might provide little tangible benefit to the majority of American renters and home buyers. We support actions he has taken to drive fraud and waste out of the U.S. housing finance system.

We expect the savings associated with FHFA's new direction to reduce Freddie Mac's general and administrative expenses in 2025 and beyond. Furthermore, we believe that regulatory changes making it easier for us to responsibly acquire loans will increase our revenue and enable us to provide even greater liquidity to the single-family and multi-family market. That should enable Freddie Mac to invest more in critical technology, increase our net worth, and lower the cost of originating a mortgage. Taking a step back, the Director has challenged us to create a more affordable U.S. housing system. We are committed to rising to that challenge. Thank you for joining us today.