Fannie Mae First Quarter 2023 Financial Results Conference Call

Fannie Mae Moderator:

Good day, and welcome to the Fannie Mae First Quarter 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 first quarter 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, their impact on our business and financial results, and the factors that will affect them; the future performance of the company's book of business; the company's business plans and their impact; and the company's financial results and the factors that will affect them. Future events may turn out to be very different from these statements.

The "Forward-Looking Statements" section in the company's first quarter 2023 Form 10-Q, filed today, and the "Risk Factors" and "Forward-Looking Statements" sections in the company's 2022 Form 10-K, filed on February 14, 2023, 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 We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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 start by spending a few minutes on the current economic environment before turning to our financial and mission performance in the first quarter of 2023. I'll then hand it over to our Chief Financial Officer, Chryssa Halley, who will discuss our first quarter results in more detail.

Macroeconomic Conditions
Well, it is no surprise that the turmoil in the banking sector during the first quarter added to the existing backdrop of economic uncertainty. Specifically for housing, one impact was the 30-year fixed-rate mortgage rate ended the quarter at 6.32%, which was 10 basis points lower than where it began the year — but still 165 basis points higher than mortgage rates the same time last year.

Home prices responded to this modest decline and increased 1%, yet home sales continued at their slowest annual pace since 2011. The increase in home prices is evidence that there continues to be significant pent-up demand for housing, despite ongoing affordability constraints.

Consumer sentiment echoes these challenges. In fact, in our most recent National Housing Survey, 79% of consumers responded that it is a bad time to buy a home, and renters indicated that high home prices are their primary concern preventing making a home purchase.

As to be expected, we continued to see a decline in single-family mortgage originations across the market, with an estimated $317 billion in single-family originations in the first quarter of this year. This is 21% lower than the market's volumes in the fourth quarter of last year and less than half of the $781 billion we saw the same time last year.

Reduced volumes constrained lender margins and contributed to the lowest employment levels in the mortgage banking industry since 2020.¹ These trends demonstrate notable market pressures on our lender counterparties, a risk that we're following closely.

Overall, I am pleased that during this time of economic uncertainty and volatility, Fannie Mae continued to support qualified buyers, generating strong financial results, and stayed focused on effectively managing risk. In doing so, we remained a source of stability and strength to the housing finance system and the broader economy.

First Quarter Financial Results
Now, turning to our first quarter performance. Despite the challenging operating environment, we reported $3.8 billion in net income and $6.8 billion in net revenues. As a result, we were able to continue to build our net worth through retained earnings, which increased to $64 billion as of the end of March. While our quarterly mortgage acquisition volumes were the lowest they've been since 2000, we still provided $78 billion of liquidity to the single-family and multifamily markets. In doing so, we helped 306,000 households to buy, refinance, or rent a home. This included approximately 91,000 units of multifamily rental housing, a significant majority of which were affordable to households earning at or below 120% of area median income. We also empowered 80,000 first-time homebuyers to purchase a home.

We have been able to generate these strong results — and to be there for America's homeowners and renters — because of how we effectively managed the risks of our business. For example, we actively monitor our counterparty risk across our many partners, including small and mid-size banks and non-banks as they respond to the current economic and regulatory environment. We expand access to credit responsibly for the borrowers we serve and for our own financial resilience. We actively monitor the credit quality of our existing mortgage book, which today remains sound. And lastly, because of our ability to retain earnings, we maintain significant liquidity.

Mission Performance
Now let me turn to our mission. Fannie Mae exists to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. As I did in our last call, I'd like to share a few examples of our mission in action.

First, we continue to help potential homebuyers benefit from on-time rent payments, which historically have not been included in a borrower's credit score or in the mortgage underwriting process. Our multifamily positive rent payment reporting pilot helps renters build their credit history and improve their credit score by incentivizing property owners to report on-time rent payments for their tenants who choose to participate. Since September 2022, I'm proud to say we've onboarded over 263,000 households, including helping over 8,500 residents establish credit scores. For residents who previously had an existing credit score and saw an improvement, there was an average improvement of 38 points to their score. Importantly, a majority of residents in the program are in census tracts with a minority percentage of more than 50%.

Similarly, our single-family positive rent payment history initiative encourages lenders to consider a renter's history of recurring, on-time rent payments as part of the eligibility assessment for a home mortgage. Since September 2021, we've helped lenders qualify nearly 4,000 first-time homebuyers for a mortgage using their history of consistent rent payments.

Another great example comes out of lessons learned through the use of payment deferrals during the COVID pandemic. In April, we updated our payment deferral option for other hardships. These changes include allowing borrowers who have resolved their financial hardship but are unable to cure their past due payments to defer up to six months of those payments to the end of their loan. We hope that this change will help more borrowers remain in their homes.

Finally, based on industry feedback, we updated some of the actions in our Equitable Housing Finance Plan to support historically underserved populations in their housing journeys. Plus, we included new projects that came from our Sustainable Communities Innovation Challenge, Fannie Mae's $5 million nationwide competition to identify innovative projects that promote racial equity in housing.

Wrap Up
To wrap up, I am proud of our quarterly financial results and how we continue to execute on our mission. This is a testament to years of steady transformation at Fannie Mae, our dedicated team members, and our industry partners. Fannie Mae remains committed to being a source of stability for the housing finance system and source of strength for homebuyers and renters. We are able to do so because of the changes we've made to improve the resilience of our business, our focus on risk management, and strong liquidity. This is what allows us to continue to facilitate affordable, equitable, and sustainable access to homeownership and rental housing.

Now, I'll turn it over to Chryssa to discuss our first quarter financial results.

Chryssa C. Halley:

First Quarter Results
Thank you, Priscilla, and good morning.

As Priscilla mentioned, we reported $3.8 billion in net income this quarter, a $2.3 billion increase compared to the fourth quarter of 2022. Our first quarter revenues remained strong, where we recorded $6.8 billion of net interest income. This was an approximately $300 million decline from the fourth quarter, primarily driven by lower amortization income. Amortization income declined because of lower refinancing activity, which resulted from fewer loan prepayments during the first quarter. Over 90% of our single-family book as of the end of March had an interest rate below 5.5%, over 80 basis points lower than the average interest rate for a 30-year fixed-rate mortgage as of that date, resulting in a low likelihood these loans would refinance at current rates. Partially offsetting the decline in amortization income was higher income from the other investments portfolio due to an increase in short-term yields.

In the first quarter, our provision for credit losses was approximately $130 million, significantly lower than the $3.3 billion of provision we recorded in the fourth quarter of 2022. The provision for credit losses for the first quarter of this year was driven by a multifamily provision, partially offset by a modest single-family credit benefit. The multifamily provision was primarily due to declines in property values and continued uncertainty related to seniors housing loans, including uncertainty related to adjustable-rate loans. The single-family credit benefit was primarily driven by improvements in actual and forecasted home prices, substantially offset by provision on newly acquired loans.

Let me turn to our Single-Family business to share some highlights. Due to the interest rate environment, housing affordability constraints, and limited supply, we acquired $67.5 billion of single-family loans in the first quarter, our lowest quarterly acquisition volume since the third quarter of 2000. Our average single-family book declined by approximately $300 million compared to the fourth quarter of 2022, driven by acquisition volumes being lower than loan paydowns during the quarter. 84% of our single-family acquisitions were purchase mortgages, which typically have higher loan-to-value ratios than refinances. Our first quarter single-family acquisitions had a weighted average loan-to-value ratio at origination of 79%, and 43% of these acquisitions had a loan-to-value ratio of over 80% at origination. Credit scores of our first quarter single-family loan acquisitions continued to be strong, with a weighted average credit score at origination of 751.

Turning to our full single-family book, overall credit characteristics remained strong, with a weighted-average mark-to-market loan-to-value ratio of 53% and a weighted-average credit score at origination of 752 as of the end of March. Our single-family serious delinquency rate as of the end of the first quarter was 59 basis points. While this is the lowest level we have seen since 2005, based on the macroeconomic environment, we expect the credit performance of the loans in our single-family guaranty book will decline compared to recent performance, which could lead to higher delinquencies or an increase in our serious delinquency rate. Finally, in the first quarter of this year, we transferred a portion of the credit risk on $86.5 billion of mortgages through our credit risk transfer program. In part due to these efforts, 43% of our single-family guaranty book was covered by credit enhancement as of March 31st.

Now, let's talk about our Multifamily business. We acquired $10.2 billion of multifamily loans in the first quarter against our $75 billion multifamily volume cap for 2023, a significant majority of which provided vital support for both workforce and affordable housing. This was an $8.4 billion decline compared to the fourth quarter of last year, driven by less activity in the overall market.

The credit profile of our multifamily book as a whole remains strong, with a weighted average original loan-to-value ratio of 64% and a weighted average debt service coverage ratio of 2.1 times. However, our multifamily seniors housing loans, especially those that are adjustable-rate mortgages, remain stressed, as we shared last quarter. For example, a seniors housing portfolio was the primary driver of an increase in our multifamily serious delinquency rate from 24 basis points as of year-end to 35 basis points as of the end of the first quarter. As of the end of March, 11% of our multifamily book and 38% of our seniors book was comprised of adjustable-rate mortgages. In a rising rate environment, multifamily borrowers with adjustable-rate mortgages will have higher monthly payments, which may lower their debt service coverage ratios. We continue to monitor our multifamily book and actively manage loans that may be at risk of further deterioration or default.

Outlook
I'll now take a few moments to expand on our current economic outlook. As Priscilla mentioned last quarter, we continue to expect a modest recession in 2023, although we now expect the recession will begin in the second half of the year, rather than the first half. Bank failures are often part of recessions. The stress in banking could further tighten bank credit conditions, dampen consumer and business confidence, and lead to reduced consumer spending, business investment, and hiring activity. However, the rapid increase in home sales in response to small rate declines earlier in the first quarter illustrates our expectation that the pent-up demand in the housing sector will help moderate any future recession.

Since we spoke with you last quarter, we slightly reduced our forecast for total single-family mortgage originations in 2023 to $1.66 trillion. Purchase mortgages are anticipated to be approximately $1.35 trillion, or 81%, of single-family originations. This is driven in part by our expectation that the 30-year fixed rate mortgage rate will average 6% in 2023.

We expect home sales activity this year will continue to decline compared to 2022 due to elevated mortgage rates, continued low home affordability, and the expected modest recession already discussed. We currently anticipate single-family home prices on a national basis will decline 1.2% in 2023; however, we expect regional variation in home price changes. This estimated 1.2% decline for the year is less than the 4.2% decline we shared in our previous forecast and primarily reflects first quarter home price appreciation.

In multifamily, we continue to predict 2023 originations between $385 billion and $400 billion. We also expect higher vacancy levels and stagnant rent growth in 2023, with a continued softening in rental demand coupled with elevated levels of new construction and slowing job growth.

As it relates to our revenues for the full year, we continue to project steady guaranty fee income. We also expect significantly lower amortization income in 2023 compared with 2022, driven by our expectation that refinancing activity will remain low. However, we expect the decline in our amortization income to be partially offset by higher interest income on our other investments portfolio.

Our expectations are based on many assumptions, and our actual results could differ materially from our current expectations. As a reminder, we make available on our webpages a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today.

Fannie Mae Moderator:

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

¹ According to third-party data for the fourth quarter of 2022.