Federal National Mortgage Association - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered $3.32B net income on $7.24B net revenues; efficiency ratio improved to 31.5% from 36.1% in Q1 as administrative expenses fell 15% sequentially.
• Revenue vs S&P Global consensus: company “net revenues” came in below S&P’s “Revenue Consensus Mean” for Q2 2025; we note taxonomy differences (S&P’s “Revenue” differs from Fannie’s “net revenues”). Nevertheless, Q2 2025 was a miss vs consensus, while Q4 2024 and Q2 2024 were beats and Q1 2025 was a miss (see Estimates Context) [GetEstimates]*.
• Credit provisioning rose to $946M driven by lower actual and projected single-family home price growth and declines in near‑term multifamily property values; SDQ rates improved modestly QoQ in both businesses.
• Strategic catalyst: launch of AI-powered mortgage fraud “Crime Detection Unit” with Palantir to strengthen safety and soundness—management framed this as an efficiency and loss prevention driver.
• Net worth crossed $100B for the first time ($101.64B) and regulatory capital deficit narrowed; illustrative return on required CET1 was 9.5% in Q2, supporting the capital build narrative.

What Went Well and What Went Wrong

What Went Well

• Expense discipline: non‑interest expense fell $256M QoQ; efficiency ratio improved to 31.5% vs 36.1% in Q1 and 31.3% a year ago.
• Durable fee income: guaranty fee‑driven revenues remained steady, with average charged single‑family fee at 48.3 bps and multifamily at 73.3 bps; NIM remained relatively stable.
• Strategic initiative and tone: “Fannie Mae gets stronger by the day… we will continue operating the company as a for‑profit enterprise so that we can drive down housing costs and deliver maximum value for the American people,” said Chair William J. Pulte; CEO emphasized “another solid quarter… building regulatory capital and achieving attractive returns”.

What Went Wrong

• Provisioning headwind: credit loss provision surged to $946M (vs $24M in Q1), primarily from lower single‑family HPA and multifamily property value declines, compressing net income QoQ and YoY.
• Single‑family pretax income decreased 6% QoQ on higher provision; DTI>43% and FICO<680 acquisition mix ticked up, requiring monitoring amid macro affordability pressures.
• Multifamily pretax income fell 22% QoQ with higher foreclosed property expenses and smaller change in credit enhancement recoveries vs prior year, and a 0.61% SDQ rate that remains elevated vs pre‑2024 levels.

Transcript

Operator (participant)

Good day, and welcome to the Fannie Mae Second Quarter twenty twenty five Financial Results Webcast. At this time, I will now turn it over to your host, Terrence O'Hara, Fannie Mae's Director of Enterprise Communications.

Terence O'Hara (Director, Enterprise Communications)

Hello, and thank you for joining today's webcast to discuss Fannie Mae's second quarter twenty twenty five financial results. Please note this webcast includes forward looking statements, including expectations related to housing market conditions, the future performance of the company's book of business, the company's future financial performance and the company's future plans and their impact. Future events may turn out to be very different from these statements. The forward looking statements section of the company's second quarter twenty twenty five Form 10 Q filed today and in the company's 2024 Form 10 ks filed on 02/14/2025, identify factors that may lead to different results. A recording of this webcast may be posted on the company's website.

We ask that you do not record this webcast for public broadcast and that you do not publish any full transcript. I'd like now to turn the call over to Fannie Mae's President and Chief Executive Officer, Priscilla Amadovar and Fannie Mae Chief Financial Officer, Krista C. Haley.

Priscilla Almodovar (President & CEO)

Good morning. Thank you for joining us for Fannie Mae's second quarter earnings call. Today, we're excited to share some changes to our quarterly earnings materials, which we made to help enhance the understanding of our results. You'll notice that we've rebranded what we previously called our financial supplement into an earnings presentation. During this call, we'll refer to the earnings presentation to share our results and explain the drivers of our performance.

And with that, let me start with key highlights for the second quarter on page one. We reported 3,300,000,000 of net income, which is down 9% versus first quarter and down 26% year on year, predominantly due to a higher provision for credit losses. Net revenues were $7,200,000,000 up 2% versus first quarter and relatively flat year on year. Meanwhile, our focus on efficiency remains a top priority. And during the quarter, non interest expenses were down over $250,000,000 versus the prior quarter.

Reflecting the progress on expenses, our efficiency ratio this quarter was 31.5%. This progress on expenses was greatly aided by the efficiency and deregulation efforts of direct to Pulte and the entire team at U. S. Federal Housing. Our guarantee book was held relatively flat at 4,100,000,000,000.0 drove our second quarter guarantee fee revenues, and we built $3,700,000,000 of regulatory capital.

We calculate illustrative return on required common equity Tier one as a way to measure and compare our performance to peers. And in the second quarter, our return on equity was 9.5%. Now, turning to our impact. At Fannie Mae, our mission is the heart of what we do. In the second quarter, we proudly continued to make a material positive impact for American households.

Despite a sluggish spring home buying season, we provided a $102,000,000,000 of liquidity to the mortgage market. This helped 381,000 households, including a 183,000 homebuyers, 52% of whom were first time homebuyers. We also helped to keep over 25,000 households in their homes by offering various forms of assistance. Year to date, we have provided a $178,000,000,000 of liquidity to the mortgage market and have helped 668,000 households buy, refinance, or rent a home in The US. Additionally, this quarter, we had a few notable achievements at Fannie Mae.

We announced a fraud detection and prevention partnership with Palantir Technologies. We surpassed 100,000,000,000 of total equity, which we refer to as net worth, ending the quarter at $101,600,000,000 And we ranked 25 in the twenty twenty five Fortune 500. In summary, the second quarter delivered on our expense focus, while also highlighting our steady revenues and commitments to building capital and achieving attractive returns. We are steadfast in our mission and in safely and soundly making a positive impact on American housing. In partnership with director Pulte and US Federal Housing, our Fannie Mae team is deeply engaged and energized to continue to find ways to make housing more affordable, drive efficiencies, and prevent fraud.

Now I'll turn the call over to Kirsta Haley, our Chief Financial Officer, to walk through the financial results in more detail.

Chryssa Halley (EVP & CFO)

Thank you, Priscilla, and good morning, everyone. Picking up on Page two, as Priscilla mentioned in the second quarter, we earned $3,300,000,000 of net income, had generally stable revenues versus comparable quarters, lower noninterest expenses, and higher provision for credit losses. I'll address credit and the provision in more detail in a moment, but the increase in provision is the main factor driving net income lower in the second quarter versus comparable quarters. Our total assets have stayed relatively flat compared with the first quarter and year over year as dynamics in the housing market continue the trend of fairly muted refinancing activity and new acquisitions coming in a bit short of portfolio runoff. Wrapping up this page, our net worth has grown 18% in the last year.

And in second quarter, we had a return on assets of 31 basis points and a return on risk weighted assets of 1%. On Page three, we highlight the drivers and components of net interest income. Our guarantee business drives the majority of our net interest income, and our guarantee book balance is impacted by home prices, mortgage rates, and over time, our market share. So far in the first half of the year, you'll see the composition of net interest income is trending similarly to full year 2024. This again is due to trends in the housing market, namely mortgage rates, which remained elevated and home price appreciation up 2% in the quarter, keeping purchase and refinance activity relatively low versus levels we saw in 2020 and 2021.

Overall, our base guarantee fee income has remained fairly steady in the last three years because the guaranteed book UPB has remained around the same level. Deferred guarantee fees have tapered off since levels seen in 2021, largely because of slowing prepayment rates, which slows down the recognition of the deferred fees. You'll also notice over the last few years that our liquidity and retained mortgage portfolios have contributed more to net interest income. Driving that increase is our significant progress building capital and the positive spread we've earned on our liquidity and retained mortgage portfolios relative to our cost of funding. Turning to Page four.

Our net interest margin, or NIM, as you can see, is relatively stable over time. The largest contributing factor to our NIM is guarantee fees. The guarantee fees, which are a fee we earn for guaranteeing timely payment of principal and interest, come through our income statement as interest income rather than fee income because we consolidate the MBS trust on our balance sheet. NIM for the second quarter and for the first half of the year was 66 basis points, similar to levels over the last few years. Fundamental to our business is strong credit risk management.

On page five, we show credit metrics and trends for the total guarantee book and for the single family and multifamily businesses. In the second quarter, we saw a 10 basis point uptick in thirty days past due loans in the single family portfolio compared to the first quarter. This is partially attributable to the seasonal downtick we tend to see in the first quarter of the year as tax refunds and bonus payments support mortgage payments and then revert to slightly higher levels of delinquency in the second quarter. Seriously delinquent rates improved modestly for both the single family and multifamily businesses this quarter versus last. On a total book basis, SDQ rates are nine basis points higher than the year ago quarter.

We are monitoring this trend and recognize the various financial pressures US households nationwide face in this environment in addition to more localized impacts of natural disasters. Of note, in our single family portfolio, the delinquency trend over the last five quarters is partially attributable to states impacted by hurricanes in the 2024 experiencing higher delinquency rates, which peaked last quarter and are now tapering off. Net charge offs for the total book and single family remain muted and flat at two and one basis points, respectively, while multifamily charge offs are up four and five basis points versus last quarter and the year on year quarter. Loans in the multifamily portfolio are bigger, and the multifamily portfolio total balance is smaller versus the single family portfolio. So we see these upticks when just a small number of loans charge off.

We built our allowance this quarter by $749,000,000 and with $197,000,000 of net charge offs, had $946,000,000 of provision expense. Both our single family and multifamily businesses contributed to the build in allowance to 20 basis points this quarter from 18 basis points in the first quarter. In single family, the main driver was lower actual and forecasted home price growth. And in multifamily, the main driver was a deterioration in actual and forecasted property values. On single family home prices, we are seeing some regional home price softness, including price declines in a small number of MSAs.

Finally, on credit. And before we move to expenses, combating fraud in the mortgage industry continues to be a high priority for us and for director Pulte. Avoiding fraud helps reduce credit losses, other expenses, and makes for a stronger mortgage market for everyone. Noninterest expenses on page six shows some of the recent progress we've made controlling costs. Total expenses were down 3% year on year and 10% compared to the prior quarter.

The decrease in expenses is mostly attributable to reductions in employees and contractors as well as a decrease in credit enhancement expenses. This quarter, occupancy expenses were higher, particularly on a year on year basis due to accounting impacts from changes to our headquarter location lease. Our administrative expenses, consist of salaries and benefits, professional services, occupancy and technology, were down 6% year on year and down 15% versus the first quarter. So we've made some good progress on the main expenses we can control, but we continue to look for opportunities to bring administrative costs down. Reflecting the improvement in costs, our efficiency ratio was 31.5% compared to 36.1% last quarter and 31.3% in the year over year quarter.

Moving to page seven, we show a snapshot of our liquidity and debt portfolios. Of note this quarter, the balances of the liquidity portfolio and debt portfolio declined, largely due to maturities of long term debt that we did not replenish with new issuances. Page eight shows our continued strong progress building capital, specifically common equity, by retaining our net income. As we've mentioned, our second quarter net worth is $101,600,000,000 which has increased $88,000,000,000 since January 2020. On a regulatory capital basis, we have a total capital deficit of $29,000,000,000 as of second quarter, mainly because senior preferred stock does not count as regulatory capital.

Our deficit continues to shrink as we generate net income as well as take other capital optimization actions. To fulfill our regulatory capital requirements, including buffers, as of the second quarter, we need to hold $139,000,000,000 of common equity tier one capital or CET1. On a normal course basis, the main contributor to building CET1 is net income. Similarly, our risk weighted assets are predominantly impacted by changes in credit risk weighted assets and less so changes in market risk or operational risk. We built CET1 by $45,000,000,000 since the 2022.

And while we have a long way to go, remain focused on responsibly building towards our regulatory capital requirements. Now turning to the results of our two business lines. On Page nine, our single family business, which today represents 88% of the guarantee portfolio and 84% of our net revenues, had another quarter of consistent strong results. The $737,000,000 provision this quarter was a function of $629,000,000 of allowance build due to the factors previously mentioned and $108,000,000 of net charge offs. The single family guarantee book is relatively flat compared to comparable quarters, while second quarter loan acquisitions of $84,000,000,000 improved from first quarter levels due to seasonal trends and a slight uptick in refinance activity.

On Page 10, the credit profile of the single family business continues to be strong with acquisition credit metrics trending consistently on both a weighted average OLTV and FICO score basis. In the second quarter, we saw acquisitions trend slightly higher on a debt to income greater than 43% and FICO score less than six eighty basis, and we are monitoring those items. You'll notice on the page that the DTI greater than 43% chart shows that ratio increasing over the last four years. A factor contributing to that trend is as mortgage rates have increased, our mix of purchase volume in relation to refinancing volume has gone up, and purchasers tend to enter at or near their monthly mortgage payment affordability level. So we would anticipate this mid thirties percent level to persist until rates trend downwards.

We continue to transfer a portion of the credit risk in the single family business to credit risk transfer or CRT investors. And as of second quarter, 38% of the outstanding book was in a CRT transaction. Our multifamily business results on Page 11 show increasing new business volumes of $17,400,000,000 a $5,600,000,000 increase from the first quarter. The $2.00 $9,000,000 provision was the result of $120,000,000 of allowance build due to the factors previously mentioned and $89,000,000 of net charge offs. Multifamily expenses this quarter of $278,000,000 were generally flat compared to the last quarter and up $102,000,000 compared to the year over year quarter, mainly as a result of smaller change in credit enhancement recoveries and higher foreclosed property expenses.

Lastly, page 12 illustrates the consistent credit quality of the multifamily book. Debt service coverage and original loan to value metrics from both the total outstanding portfolio and new acquisitions remain at levels similar to the credit profile for the last few years. As of the second quarter, we continue to have 99% of the multifamily book covered by some form of lender loss share, and 35% of the multifamily book is covered by a CRT transaction. To wrap up, this quarter demonstrated our durable revenue, expense discipline and continued strong credit quality. We are closely monitoring conditions in the mortgage market and are operating the business, taking those factors into account.

Picking up on the earnings material changes Priscilla mentioned, in addition to the new earnings presentation, we have a new data supplement pack, which we'll release quarterly. You can find the presentation, supplement and the Fannie Mae fact sheet, which we initiated last quarter, all on the quarterly and annual results section of our Investor Relations page on the Fannie Mae website. We hope you find these materials helpful, and we thank you for joining us this morning.

Operator (participant)

Thank you, everyone. That concludes today's webcast. You may disconnect.