Federal National Mortgage Association - Earnings Call - Q2 2021

Transcript

Speaker 0

Good day, and welcome to the Fannie Mae Second Quarter twenty twenty one Results Conference Call. At this time, I will now turn it over to your host, Pete Buchel, Fannie Mae's Director of External Communications.

Speaker 1

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's second quarter twenty twenty one financial results. Please note this call may include forward looking statements, including statements related to the company's business, its plans, financial results and loss mitigation activities, as well as economic and housing market conditions. Future events may turn out to be very different from these statements. The risk factors and forward looking statements sections in the company's second quarter twenty twenty one Form 10 Q filed today and its 2020 Form 10 ks filed 02/12/2021 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We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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, Hugh R. Prater and Fannie Mae President and Interim Chief Financial Officer, David Benson.

Speaker 2

Thanks Pete. Good morning and thank you for joining us as we discuss our twenty twenty one second quarter results. I will open with some key themes for Fannie Mae as we mark the halfway point of 2021. Then I'll hand it over to David Benson, our President and Interim Chief Financial Officer to discuss our results in more depth. In the second quarter, Fannie Mae maintained its steady focus on our 2021 priorities.

First, we're continued to help homeowners, renters in the broader market navigate through the pandemic. As the last few weeks have shown, COVID-nineteen is still with us. On the national level, our economy is recovering strongly, but the pandemic continues to cast uncertainty over the economy and it continues to have devastating effects for some communities. Against this backdrop, and consistent with our mission, we are continuing to help homeowners and renters looking for housing options that are affordable and sustainable. In the second quarter, we provided $384,000,000,000 in financing to help people purchase, refinance, and rent homes.

And we continue to help those struggling economically due to COVID understand their options through the here to help resources on our Fannie Mae website, especially with the end of the foreclosure and eviction moratoria. Second, we continue to make it a priority to support our employees. Underpinning our strong second quarter results are the efforts of our people, and I'm very grateful for their dedication. Motivated by our housing mission, they continue to deliver extraordinary work under challenging circumstances. As progress on the pandemic continues, we will continue to engage with our employees to develop a new flexible hybrid model for work at Fannie Mae.

Third, this quarter again demonstrated our ability to advance our mission, operate safely and soundly, and grow our capital. In the second quarter, we reported $7,200,000,000 in net income and increased our net worth to $37,300,000,000 We remain significantly undercapitalized. But these results are further evidence that our mission, safety and soundness, and capital building do not conflict with one another, in fact they complement one another. As we move into the second half of the year, we will continue to focus on these priorities. We also look forward to building a strong collaborative relationship with acting FHFA Director Sandra Thompson and her leadership team.

She and her team are already demonstrating a predilection for both thoughtfulness and action as they reevaluate a wide range of important issues. Many people at Fannie Mae have worked with acting Director Thompson over the years. In addition to being a strong professional regulator, we know her to be deeply committed to safety and soundness and to the mission of the housing enterprises. Shortly after being sworn in, the acting director stated that broad fair access to credit and stability for financial institutions work together as pillars of the nation's housing finance system. Annie Mae shares his conviction.

We also share her understanding that in her words, there is a widespread lack of affordable housing and access to credit, problems that are especially concentrated in communities of color, end quote. Her words recognize that today's housing system has gaps that must be bridged and that the forces of the pandemic are making some of these gaps wider. We know for example that in 2019 before the pandemic, 21% of owner households and 47% of renter households were cost burdened spending 30% or more of their income on housing costs. In 2019, we estimate that home prices have grown by 23% through June 2021. Meanwhile, income has grown by only nine, including government benefits and transfer payments.

Just over two weeks ago, the National Low Income Housing Coalition reported that a full time worker must now earn more than $20 per hour to rent a modest one bedroom home and almost $25 per hour to rent a two bedroom home. As HUD secretary Fudge highlighted in the preface to the report, these wages and therefore these homes are beyond the reach of too many Americans. So despite the top line numbers for the economy, housing, and Fannie Mae, we recognize that the housing market we serve is not serving the needs of everyone. We need to change that. Actions both large and small are needed to move housing in the right direction.

One small step we took this quarter was to launch Refi Now, new option that makes it easier for qualifying low income owners to refinance and reduce their housing costs. Refund now has been in the market for less than two months but we're seeing good application volume and acquisitions are starting to flow through. On a related note, I also invite you to read our recently issued third annual green bond impact report which provides more transparency into our work to become a leading environmental, social, and governance company. This year's report for the first time includes information on our single family green financing work. Fannie Mae is proud to be the largest cumulative issuer of green bonds in the world.

Since 2012, our green financing work has helped prevent an estimated 634,000 metric tons of CO two equivalent that roughly translates into removing a 137,000 passenger cars from the road. Building a housing finance system that is more affordable, fairer, and more resilient, one that is equal to today's great housing challenges, is a long term project. Every move we make in that project will be made responsibly with sustainability, safety, and soundness in the long term interest of homeowners, renters, and our business in mind. That thoughtfulness must be paired with urgency because the need for a better, fairer housing system is urgent. With that, I'll turn it over to Dave Benson who will take us through the numbers.

Over to you, Dave.

Speaker 3

Thank you Hugh. We're now more than fifteen months into the COVID-nineteen global pandemic and the overall economy is recovering more strongly than we and many others anticipated a year ago. To say that the second quarter was interesting is an understatement. GDP grew at 6.5% in the second quarter compared with the slightly over 2% trend that we've seen in recent years. Home price appreciation was historically robust driven by housing demand fueled by continued low interest rates and economic stimulus interacting with low levels of housing supply relative to demand.

Q2 home prices increased approximately 6.3%, resulting in first half twenty twenty one home price growth of 10.5%, which is the highest six month home price growth rate in the history of the Fannie Mae National Home Price Index. Both refinance and purchase markets remained vigorous, thanks in part to sustained low interest rates. These factors drove $7,200,000,000 in net income for the quarter, the highest since the first quarter of twenty thirteen, and $8,400,000,000 in net revenues, the highest since the first quarter of twenty fourteen. As a result, our net worth increased to $37,300,000,000 improving our safety and soundness, as well as our ability to deliver on our mission and reducing the risk of a drop on the senior preferred stock purchase agreement with Treasury. Now that said, we remain undercapitalized, as you noted.

I'd like to transition now to the largest contributors to our second quarter results, credit related income and net interest income, both of which increased quarter over quarter. Credit related income increased approximately $1,800,000,000 from the first quarter, resulting in credit income in the second quarter of approximately $2,500,000,000 mainly due to strong actual and forecasted home price growth, which reduced our loss allowance by $1,100,000,000 A redesignation of loans from held for investment to held for sale to support loan sales of higher risk loans, which contributed $678,000,000 in gains, and a continued improvement in our outlook regarding the impact of COVID driven uncertainties, which resulted in approximately $233,000,000 of benefit in the second quarter. Net interest income increased $1,500,000,000 in the 2021 compared with the first quarter of twenty twenty one, driven primarily by an increase in net amortization income, particularly in the beginning of the second quarter. Single family mortgage loan prepayment activity slowed throughout the 2021 compared to the first quarter of twenty twenty one. However, refinancing activity while down from the first quarter levels remained strong due to the continued low interest rate environment where the thirty year fixed rate mortgage hovered around 3% for much of the quarter.

We also experienced a 1,200,000,000 shift from fair value gains in the first quarter to fair value losses in the second quarter, driven by a decrease in treasury yields, which drove losses on commitments to sell securities and fair value debt as prices rose. Now, as I mentioned at the top, this quarter's results were against the backdrop of a strong economy, continued low interest rates, and a surge in home price growth. So now let me turn to our business segment results. In our single family business, net income was $6,500,000,000 and net revenues were $7,400,000,000 both of which increased quarter over quarter, impacted by the same factors driving our enterprise results. Second quarter single family total acquisitions remained strong at $373,300,000,000 down slightly from the heights we have seen over the past couple of quarters.

We experienced a decrease in refinance acquisitions in the second quarter with record purchase mortgage volume of $129,500,000,000 nearly 50% of which were for first time homebuyers. Remarkably, over half of our single family guarantee book of business has been originated in the last eighteen months, given the low interest rate environment. Credit characteristics of the single family conventional guarantee book of business remain strong with a weighted average mark to market loan to value ratio of 55% and a weighted average FICO credit score of 752. Our single family serious delinquency rate, or SDQ rate, at quarter end was 2.08%, down 50 basis points from March 31. This decline demonstrates the strength of the economy and household income support from past stimulus bills.

It also illustrates the success of the workout options we are offering to borrowers in forbearance due to COVID. Now excluding loans and forbearance, our single family SDQ rate declined slightly quarter over quarter from 66 basis points to 64 basis points. Now I would note that we provide several cuts of both our acquisition and full book data in our quarterly financial supplement published on our website in conjunction with today's 10 Q filing. Now in our multifamily business, net income was $645,000,000 and net revenues were $986,000,000 both up quarter over quarter driven by continued increase in guarantee fee revenue on a growing book of business and strong pricing on new acquisitions. Acquisitions in the 2021 of $32,000,000,000 were relatively flat compared to the first half of twenty twenty.

Given the $70,000,000,000 cap that FHFA established on new multifamily business volume for the year, this leaves approximately $38,000,000,000 of capacity for the second half of twenty twenty one. Quarter over quarter acquisitions declined from $21,500,000,000 to $10,900,000,000 based on two primary drivers. First, market competition returned in earnest during Q1 as COVID impacts began to normalize reducing our volume in the second quarter. As a consequence, our market share returned to more typical levels. Second, we reduced our second quarter acquisition pace in order to manage to our volume cap.

Now our multifamily SDQ rate was 53 basis points as of June 30, down from 66 basis points as of March 31. This decline is driven by loans that were in forbearance and have since completed repayment plans or otherwise reinstated. Our multi family SDQ rate excluding COVID forbearance was three basis points, unchanged compared to the end of the first quarter, representing continued strength of the credit profile of our book of business. Now turning to impacts from the COVID pandemic, new loans entering forbearance continued to slow during the second quarter as the economy and labor markets recover. For our single family loans, our lifetime take up rate forecast of 8.1% based on loan count is unchanged since last quarter.

Notably, over 8% of our book by loan count entered COVID forbearance, and we expect very few additions going forward. As of June of our single family book remained in forbearance. Of borrowers who have exited COVID forbearance as of June 30, thirty one percent prepaid their loans, nearly thirty one percent never missed a payment or reinstated their loans, which means they paid their missed payments in a lump sum, and nearly thirty one percent of borrowers entered into COVID payment deferral of Fannie Mae program in which forborne payments are deferred into a non interest bearing balance due and payable at maturity of the loan or earlier payoff. Encouragingly, as of June 30, ninety six percent of loans in COVID payment deferral were current. Now as we approach the pandemic's eighteen month mark and reach forbearance extension limits, we may see more borrowers who have not resolved their hardship move into loan modifications.

These include the flex modification for COVID to which we recently announced changes that provide an interest rate reduction for all borrowers regardless of their mark to market loan to value ratios. The moratorium on single family foreclosures put in place last year as a result of COVID expired on July 31. However, beginning August 1, our servicers were required to comply with the CFPB's final rule on federal mortgage servicing regulations, which was announced in June and precludes the initiation of certain foreclosures through year end. As such, we expect foreclosure volumes to be limited throughout the rest of this year. In multifamily, our lifetime forbearance take up rate forecasts of 2% based on unpaid principal balance is also unchanged since last quarter.

1.6% of the March 2020 multifamily book has entered forbearance so far, with no new loans entering forbearance in the second quarter. Over 70% of the active loans that entered forbearance exited through repayment plans or reinstated with approximately 7% defaulting on the forbearance agreements. Only 0.2% of our multifamily book remains in active forbearance. So finally, let me share some thoughts on the economy. While the initial surge in growth driven by the reopening of the economy has passed, we expect continued economic strength throughout 2021, although significant risks to the outlook remain, including risks relating to labor shortages, supply chain disruptions, the potential for higher inflation, and the impact of the Delta variant in The US and abroad.

We have revised our home price growth estimates for 2021 from 8.8% to 14.8% based on strong price momentum and a continued expectation of tight supply. We expect home price growth to moderate through the remainder of the year and into 2022 as the demand and supply dynamic begins to normalize. We also expect total 2021 single family market originations to decline somewhat relative to the prior year, and the mix of originations is expected to shift. In 2021, we expect purchase originations to increase 11% relative to 2020 to a total of $1,800,000,000,000 driven by higher home sales and strong home price growth as the market recovers from the pandemic. For the second half of this year, we expect refinances to fall due to a modest expected rise in interest rates, which will likely drive fewer loan prepayments and lower amortization income than the first half of this year.

Now in multifamily, our outlook for the remainder of the year has improved. We expect the volatility in rent growth stemming from pent up demand to last through the summer and begin to normalize in early autumn as local economies further stabilize. Although we continue to be cautious given the risk to the outlook mentioned above. While the federal eviction moratorium has now expired and the outcome of the expiration is unknown, the recent increases in job growth and wage growth support a more optimistic outlook for rental payments. In 2021, we expect multifamily market originations to increase to between $315,000,000,000 and $325,000,000,000 driven by continued market recovery from the pandemic.

So with that, let me turn it back to you, Hugh.

Speaker 2

Thank you, Dave, and thanks to all of you for listening.