Federal National Mortgage Association - Earnings Call - Q4 2020

Transcript

Speaker 0

Good day, and welcome to the Fannie Mae Fourth Quarter twenty twenty Results Conference Call. Today's conference is being recorded. I would now like to turn it over to your host, Pete Bakel, Fannie Mae's Director of Public Relations.

Speaker 1

Thank you. Hello, and thank you all for joining today's media call to discuss Fannie Mae's fourth quarter and full year twenty twenty financial results. Please note this call may include forward looking statements, including statements related to the company's business and financial results, its future loss mitigation activities and their outcomes, the impact of COVID-nineteen pandemic and recent amendments to the company's preferred stock purchase agreement with the treasury, economic and housing market conditions, the company's capital requirements and the company's business plans and strategies. Future events may turn out to be very different from these statements. The risk factors and forward looking statements sections of the company's two thousand and twenty four ten k filed today describe factors that may lead to different results.

As a reminder, this call is being recorded by Fannie Mae, and the recording 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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 Chief Financial Officer, Celeste Millet Brown.

Speaker 2

Welcome and good morning. Thank you for joining us to discuss our fourth quarter and year end results for 2020. Before I hand off to Celeste to discuss our results in-depth, I'd like to offer a few thoughts on the extraordinary year behind us and the road ahead in 2021. 2020 was truly an historic mission moment for Fannie Mae. As you know, we were chartered over eighty years ago to ensure a liquid secondary market for housing finance in both good times and bad for lenders both large and small.

Our mission is to help ensure that housing finance is affordable and available, and I believe that we have fulfilled that mission very well through most of our existence. Much has been written about the causes of the last financial crisis in 2008 and the roles of the various actors including the GSEs. But there is little debate about the positive role we are playing in today's COVID crisis. That's because today's Fannie Mae is very different and far more resilient than the Fannie Mae of yesterday. And in 2020, with the greatest labor market disruption since the Great Depression, we provided historic amounts of liquidity to the mortgage market and we provided forbearance to more than 1,000,000 homeowners to help keep them in their homes.

In partnership with our board of directors and our conservator FHFA, we have spent the past dozen years transforming Fannie Mae to prepare for a mission moment like this. Our immediate and most urgent focus this past year was helping America's homeowners and renters who are struggling with the economic impact of the global pandemic. Working closely with FHFA, we launched critical solutions in record time. We worked hand in glove with our lenders and servicers to ensure that they are helping our borrowers know, understand, and take advantage of their options. These efforts resulted in more than 1,300,000 of our single family borrowers getting needed relief through forbearance plans.

For renters, we took steps with our multifamily lenders to prevent evictions from properties that we finance. We launched our nationwide Here To Help campaign to reach struggling homeowners and renters to make sure they are aware of the resources available to them to stay in their homes. Through December, Here To Help has reached more than 150,000,000 consumers. And approximately 60% of these consumers are from minority, women, or disabled populations. With our partners in the disaster response network, we've helped connect homeowners and renters with federal and local support services.

We typically use this network to help consumers respond to natural disasters. Today, we've activated these capabilities to help consumers deal with a disaster of a different type, fielding tens of thousands of calls from borrowers and renters in need. We saw that thousands of homeowners were falling behind on their mortgage payments but weren't taking advantage of forbearance. So we increased our educational outreach efforts to help them understand their options. We did the same with lower income homeowners who could potentially reduce their monthly payments by refinancing, but had not yet applied for it.

Our ability to help millions of homeowners and renters hit by the pandemic was not accidental. It was the result of our long partnership with FHFA to reform the company and to incorporate lessons learned from working with homeowners in distress. The pandemic also presented an historic challenge for the broader market and our mission to provide a stable source of liquidity through all market conditions. In the early stages of the pandemic, when the financial markets were volatile, other sources of mortgage finance quickly stepped back from the market. We did not.

Instead, we stepped forward and continued to offer mortgage financing. And that evolved into a record year of mortgage activity resulting in billions of dollars of savings for households. Altogether, we provided more than 1,400,000,000,000.0 in mortgage liquidity in 2020 as record low interest rates drove a record demand for mortgage financing. We financed one and a half million home purchases in '20, up more than 20% from 2019. We also refinanced 3,400,000 loans, up more than 200% from last year, helping homeowners take advantage of historically low interest rates.

And we financed 792,000 units of rental housing with more than 90% of them affordable to families earning at or below a 120% of the area median income. 2020 was also the year where our country's deep racial and social inequities came to before. Inequities that have long affected our most basic need, a roof over our heads. We are not mere observers here. Our role in housing gives us the ability and responsibility to drive positive change and we intend to do so.

It starts within our company where we are deeply committed to diversity and inclusion. We do this not only because it's right, but because it helps us better see and serve our diverse communities. We are also committed to working with partners across housing to advance opportunity and tackle racial injustice. These commitments go to the heart of our charter and who we are. The gap in minority home ownership is long standing, and economic downturns such as 2008 and 2020 only make it harder to overcome.

So this is a complex challenge that Fannie Mae cannot address on its own. It is our intention to do all we can to work with our partners in the housing industry to do the same. All in all, 2020 tested us in unprecedented ways. And I'm proud of how our people came through helping us serve the market when the market needed us most. And I give special thanks for the support of the FHFA and our board of directors throughout this challenging year.

Finally, we began 2021 with treasury's amendments to the preferred stock purchase agreement. I firmly believe that a responsible exit from conservatorship and a recapitalization of Fannie Mae is the best way to support our mission to serve America's housing needs for future generations while protecting the taxpayer and creating a substantial layer of loss absorbing capital. The amended agreement continues us down that path. It allows us to continue to grow our capital through retained earnings and it provides with the possibility of raising private capital. And it creates a potential path to responsibly exit conservatorship when we achieve certain levels of capitalization while also providing optionality for policy makers on the path forward.

For our part, we recognize that safety and soundness, including a strong capital base, is critical to our future as an independent mission driven commercial enterprise. While we put our mission first, we cannot fulfill that mission through market cycles unless we are safe and sound and properly capitalized. And we cannot be properly capitalized unless we are investable and can attract risk capital from the private sector. We continue to believe that a Fannie Mae that is reformed, well regulated, well capitalized, and out of conservatorship will best serve the needs and interests of our nation's housing markets and our housing mission. It will help us ensure stability and a steady supply of liquidity through all market cycles.

And just as importantly, it will help us deliver more dynamic and innovative solutions to expand housing opportunity, address racial disparities, and help manage and mitigate the growing risks from climate change. To wrap up my remarks, 2020 demonstrated the essential role we play for homeowners, home buyers, and renters, the housing finance system, and the economy even under the most challenging conditions. As we go into 2021, the nation is not yet out of the woods, and our mission is as critical as ever. We continue to focus on ensuring stability and liquidity in the mortgage market. And as always, we continue to focus on safety and soundness, including building our capital base and a sustainable and investable enterprise.

With that, I'll turn it over to Celeste who will take us through the numbers. And then Celeste and I will be happy to answer any questions you have before wrapping up today's call. Les, take it away.

Speaker 3

Thank you, Hugh, and good morning, everyone. As Hugh discussed, 2020 was a year of unprecedented challenge for Fannie Mae and the world. The pandemic and our response demonstrated our critical role supporting housing finance across all market and economic conditions. Even as private mortgage liquidity withdrew when economic uncertainty of the pandemic took hold, we remained a constant and stable source of liquidity. This was particularly evident in our whole loan conduit, which is vital to smaller lenders who are often key sources of housing finance to underserved rural and urban areas.

Our conduit volumes more than doubled to nearly 750,000,000,000 in 2020. And more broadly, we provided record liquidity to the single family and multifamily markets. Perhaps most critically, a decade plus of work to strengthen our risk management was evident in 2020. The financial results and the health and resiliency of America's housing system in the face of the pandemic stands in stark contrast to 2008 when housing was a key driver of the financial crisis. As Hugh mentioned, FHFA and Treasury agreed to amend the senior preferred stock purchase agreement or PSPA.

This amendment has many implications for us. Critically, the amendment suspends the net worth sweep and allows us to build our capital until we achieve adequate capitalization under the new enterprise capital framework. This is essential as building substantial GSE equity and capital remains a key unfinished aspect of our transformation under conservatorship. Additionally, the amendment formally creates a foundation for exiting conservatorship. We believe that recapitalizing and exiting conservatorship is an important goal as it will enhance our safety and soundness, protect the American taxpayer, and we believe allow us to be more dynamic and better positioned to meet our mission and the constantly evolving needs of the housing system.

The amendment also introduced some new limits on acquisitions of mortgages with multiple risk layers and the financing of second homes and investor properties and imposed additional constraints on our multifamily acquisition volume. We are assessing the operational and financial impact of these limits, but we anticipate fully adapting to them as we have to many other changes over the years. The amendment also includes a size limit on the use of the whole loan conduit by originators. While we are still evaluating the impact of this limit, we believe that most of our small lenders for whom the conduit provides funding will be unaffected by the new cap. This is particularly important as small lenders are critical to our mission since they support the availability of mortgage finance in underserved areas.

And while the capital we need to exit is significant, the changes we make in response to the PSPA amendment will likely decrease our capital needs over time as they will reduce the amount of leverage based and risk based capital required to support our business. Let me turn to our results. Extraordinarily low interest rates and the robust housing market continued into the fourth quarter. Acquisition volumes were at record levels for the quarter, leading to 9% growth in our guarantee book in 2020. Refinancing activity was significant, accounting for 66% of acquisitions in 2020 compared to 42% in 2019.

Home prices were strong as well, growing by an estimated 10.5% in 2020, including 3% in the fourth quarter when prices are typically flat or down. We achieved strong financial results against this backdrop. For the fourth quarter, net revenues of $7,200,000,000 grew 7% from the third quarter. Comprehensive income of $4,600,000,000 increased by approximately 8% quarter over quarter, reflecting the higher net revenues and $1,400,000,000 of credit related income that was partially offset by increases in fair value losses of nearly $900,000,000 and lower investment gains. Full year net revenues increased 16% to $25,300,000,000 as record acquisition volumes drove higher remitted guarantee fee income and accelerated net amortization income.

However, full year comprehensive income of $11,800,000,000 declined 16% largely due to a shift from $3,500,000,000 of credit related income in 2019 to nearly $900,000,000 of credit related expense in 2020 as a result of the pandemic. A number of items affected our credit expense in 2020. Most significant was the $2,600,000,000 credit allowance booked in the first quarter, predominantly driven by the expected impact of the pandemic. Subsequently, credit results improved due to strong home price growth and low interest rates. The credit results also benefited from fewer loans entering forbearance versus our initial expectations, along with better outcomes for loans exiting forbearance than we expected at the outset and a roughly $700,000,000 benefit from the redesignation of reperforming loans prior to sale from the portfolio.

As you know, selling nonperforming and reperforming loans has been an important part of our credit loss mitigation strategy in recent years. Now let me turn to our segment results, starting with single family. In the fourth quarter, single family net income of $3,900,000,000 increased 4.6% from the third quarter as higher credit related income and net revenues were partially offset by higher fair value losses and lower investment gains. As already discussed, record volumes continued in the fourth quarter and the year. In 2020, single family acquisitions more than doubled to nearly $1,400,000,000,000 and the guaranteed book grew by over 8%.

Acquisition growth, particularly from refinancing, drove an 18% increase in single family revenues to $21,900,000,000 in 2020. However, single family net income declined 16.5% largely because of the shift from credit income expense in 2020 discussed previously, while lower investment gains and higher fair value losses also contributed. The credit quality of single family acquisitions remained strong, helped by the high share of refinance volumes, which typically have better credit profiles. In 2020, acquisition LTVs improved five percentage points, 500 basis points, to 71% and FICO scores increased by 11 points to seven sixty. The single family serious delinquency rate of 2.87% decreased by 33 basis points in the third quarter, reflecting loans exiting forbearance and becoming current.

Excluding loans in COVID related forbearance, the SDQ rate would have been 66 basis points in the fourth quarter, in line with the third. Turning to multifamily, fourth quarter net revenues of just under $1,000,000,000 were 19 percent higher than in the third, while net income grew 36% to over $600,000,000 reflecting higher revenues and a shift from credit expense in the third quarter to credit income. Multifamily acquisitions for the year were a record $76,000,000,000 driving nearly 14 guaranteed book growth in 2020. Total five quarter acquisition volume through year end twenty twenty under FHFA's $100,000,000,000 cap for that period was $94,000,000,000 and we met the cap's 37.5% minimum requirement for mission driven housing. FHFA has set the fiscal year twenty twenty one acquisition cap to $70,000,000,000 and increased the mission driven housing requirement to 50%.

The PSPA amendment established an additional $80,000,000,000 limit on our multi family mortgage acquisitions during any fifty two week period. While the $70,000,000,000 multi family volume cap remains in effect for 2021, the new $80,000,000,000 PSPA limit operates as an independent limit on our future multi family acquisitions. Given very strong demand and our supply being constrained by the volume cap imposed by the FHFA, we have had to take certain actions to slow our acquisition rate, including raising pricing. Multifamily's fourth quarter serious delinquency rate fell 14 basis points to 98 basis points from the third as loans exited forbearance and, in most cases, started to reperform. Excluding loans that have received the forbearance, the fourth quarter SDQ rate would have been three basis points.

Now let me give you an update on COVID related forbearance. Our take up rate expectations remain largely unchanged from the third quarter with forecasted lifetime COVID related forbearance of eight point five percent for single family and five percent for multifamily. In single family, approximately 1,300,000 loans or seven point seven percent of the single family guarantee book based on loan count have entered forbearance since the start of the pandemic. By the end of twenty twenty, sixty percent of these loans have already exited and with predominantly positive outcomes, with approximately 20% liquidating because borrowers refinanced or sold their homes. Approximately 500,000 loans or 3% of the single family guarantee book based on loan count remained in active forbearance at year end.

Of these loans, 12% were current. For multifamily, over 60 of the $5,300,000,000 of UPB that has entered forbearance to date has since successfully exited and either reinstated, liquidated, or entered a repayment plan. Approximately 40 basis points of multifamily UPB remained in forbearance at the end of twenty twenty. As we have previously noted, we continue to accrue interest on most COVID affected delinquent loans. This interest amounted to $2,800,000,000 for 2020 and was partially offset by a roughly $200,000,000 credit provision.

Additionally, we advanced $1,200,000,000 of principal and interest to Fannie Mae Trust in 2020 for past due loans and forbearance to ensure timely payment to MBS investors. We are optimistic that a significant portion of loans in COVID forbearance will be resolved successfully as to date, most loans exiting forbearance through a payment deferral or modification have been able to re reperform or repay. Nonetheless, there remains some risk, and there is no certainty around how the pandemic and economy may evolve in 2021. For example, FHFA recently announced that some loans may be eligible to remain in forbearance for up to fifteen months. The extension will provide borrowers affected by the pandemic more time to get their finances back on track, and we are hopeful that this will result in loans successfully resolving after forbearance.

However, there is a risk that loans remaining in forbearance for a longer period of time may decrease the likelihood of a successful outcome. If a single family loan does not resolve and either remains nonperforming for a prolonged period or enters a flex modification, then we are required to purchase it out of trust. While these purchases were $5,400,000,000 in 2020, we anticipate they could grow significantly in 2021. At year end, dollars 108,000,000,000 of single family UPB was in forbearance, including $81,000,000,000 that was ninety plus days delinquent. We currently estimate that approximately 30% of loans in forbearance may eventually need to be repurchased.

While our credit allowance already reflects expected life of loan losses, any purchases will increase the size of our retained portfolio. We will need to manage the impact of that on our interest rate risk, capital and retained portfolio cap. Well, FHFA has directed us to pause our sales of nonperforming and reperforming loans through February 28 as they evaluate the requirements that will apply to future loan sales, over time, we may seek to sell portfolios of these loans to mitigate their impact on our risk and balance sheet. Turning to capital. FHFA recently issued its final capital rule.

Compared with the conservatorship capital measures established in 2018, the final rule has higher buffer requirements, countercyclical requirements, risk weight floors and reduced relief from CRT. All of this will result in a material increase in our capital requirements. While our net worth at year end was $25,300,000,000 the estimated total capital requirement under the new rule would have been approximately $185,000,000,000 including $135,000,000,000 in common equity Tier one or CET1 capital. As I noted before, the amended PSPA offers a path to exiting conservatorship once our CET1 reaches 3% of adjusted total assets, which we estimate would have required CET1 of $124,000,000,000 at year end. The amendment allows us to continue to retain capital and permits our raising external capital in the future if certain conditions are met.

We are evaluating how to best meet our capital requirements in a prudent manner. And a final note on capital, you will recall that we paused our CRT program due to market conditions and to evaluate its costs and benefits. Although CRT provides significantly less relief under the final capital rule, it remains an important tool that can help us manage capital and risk, and we continue to assess the scale and structure of any potential CRT transactions we may issue in the future. Now let me conclude with some comments on outlook. We expect the economy to rebound in 2021 and forecast 6% annual growth in GDP.

We believe economic growth will accelerate significantly starting in the spring, assuming vaccination efforts continue, additional stimulus pass and additional stimulus passes prompting a recovery in consumer spending. We also expect strong economic growth to continue to support housing price growth, which we currently forecast at 4.5% in 2021, though we do expect home price growth to slow after 2021. While we do not anticipate rate actions by the Fed this year, there is a chance for mortgage rates to begin to increase if economic growth is as robust as we anticipate. We expect mortgage originations to remain strong at $3,900,000,000,000 in 2021, but down from the record $4,400,000,000,000 last year. Such activity would fuel continued growth in our guarantee book and in remitted guarantee fee income.

While we expect amortization income to remain high in 2021, we expect it to decline from 2020 as refinance activity will likely begin to slow in the second half of this year. In terms of credit, the continuation of the strong housing market and an expected economic recovery in 2021 would be positive factors. However, much uncertainty remains as new COVID variants appear, and it is difficult to forecast the success of the vaccine rollout and the effectiveness of fiscal intervention in addressing economic strains relating to the pandemic. The outlook for credit in 2021 will continue to depend largely on the pandemic's impact on the economy and housing. I also want to note that we just adopted hedge accounting, which will reduce reported earnings volatility related to interest rate exposure, although we will continue to have exposure to spreads.

We will discuss the impact of hedge accounting in future quarters since it will begin to affect year over year earnings comparisons in the first quarter. Let me conclude by noting the obvious. 2020 was a unique and challenging year. The economic impact of the pandemic underscored the importance of safety and stability in the housing market. A decade of hard work by the GSEs and FHFA made the resiliency of America's housing market today possible.

We understand our role in managing risk in housing finance, to implement critical government housing policy like COVID relief, to be a constant and set steady source of liquidity to the housing market, and to support affordable mortgage financing. We take these responsibilities seriously, and 2020 was a real test of our abilities. We are proud of our efforts to help America's homeowners and renters. We are also excited about the changes that the new PSPA amendment will allow. And with that, I'll turn things back to Hugh.

Speaker 2

Well, you, Celeste, and I believe we're ready now, to take your questions.

Speaker 0

Thank you. We will now open the call for questions that pertain only to the earnings statements just released. There will be no q and a on any other topics. Thank you. If you are a reporter and would like to ask a question, please press star and then one on your telephone.

If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. All lines will be muted unless you are asking a question, I will pause for just a moment to allow everyone an opportunity to signal. Once again, if you are a reporter and would like to ask a question, please press star and then one on your telephone. Alright. Thank you.

It appears there are no questions at this time. I will now turn the call back over to Fannie Mae, chief executive officer Hugh R. Froedter. Please go ahead, sir.

Speaker 2

Well, thank you everyone for, for listening today, and, we look forward to, look forward to seeing you next time. Thanks a lot.