Fannie Mae Fourth Quarter and Full-Year 2022 Financial Results Conference Call

Fannie Mae Moderator:

Good day, and welcome to the Fannie Mae Fourth Quarter and Full-Year 2022 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 Fourth Quarter and Full-Year 2022 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 "Risk Factors" and "Forward-looking Statements" sections in the company’s 2022 Form 10-K, filed today, 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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:

Introduction
Thank you, Pete, and thank you all for joining us today. I'm honored to be here for my first earnings call as Fannie Mae’s Chief Executive Officer. I'm glad to be joined by Chryssa Halley, our Chief Financial Officer. I'll start by sharing perspectives on the economic environment before recapping our performance for the fourth quarter and in calendar year 2022. Then, I will reflect on our progress made toward our strategic priorities. And, finally, I’ll spend a few minutes on our current 2023 outlook.

Economic Conditions
So let me start with the economic environment. Higher mortgage rates and home prices during the course of 2022 continued to directly impact the housing finance system, the people it serves, and our business. Mortgage rates ended 2022 at 6.42%, rising from 3.11% at the end of 2021. The rise in mortgage rates was a significant factor in slowing both refinances and purchase mortgage originations.

As for home prices, 2022 was a year of transition. For reference, in 2021, single-family home prices grew almost 19%. That is the highest annual growth rate in the history of Fannie Mae's home price index. Conversely, during the first half of 2022, home prices increased by 10.7% nationally, but fell 1.4% in the second half. So, while we estimate average home prices rose 9.2% in 2022, price momentum turned during the year. Our expectation of further home price declines in 2023 and 2024 contributed to our provision for credit losses in the full year and in the fourth quarter. Chryssa will speak to this in more detail.

Also, we saw home sales, mortgage originations, and housing starts fall dramatically. Beyond housing, while unemployment remained low, wage growth has not kept pace with inflation. Taken together, these factors continue to negatively impact housing affordability for families and individuals. In fact, based on our estimates and assumptions, mortgage payments for would-be homebuyers were nearly 50% higher at the end of 2022 than they were at the end of 2021. Similarly, renters faced affordability challenges. While rent growth in the fourth quarter turned negative, we saw full-year rent growth of an estimated 4.8%. These headwinds help explain why Fannie Mae's January Home Purchase Sentiment Index remains near its all-time low set in October. Only 17% of respondents believe it's a good time to buy a home.

2022 and Fourth Quarter Performance
Not surprisingly, this economic backdrop and slowing mortgage demand impacted how our business performed in the fourth quarter and in 2022. While we saw significantly lower single-family business volumes for both purchase and refinance mortgages, we still provided $684 billion in liquidity to the single-family and multifamily markets last year. This meant help for approximately 2.6 million households who bought, refinanced, or rented a home.

We are proud that this support enabled financing for 543,000 first-time homebuyers, representing more than 45% of the single-family home purchase loans we acquired in 2022, and 598,000 units of rental housing, with a significant majority affordable to low- and moderate-income families earning 120% of area median income or lower. While providing this support, we reported net income of $12.9 billion in 2022, with $1.4 billion attributable to the fourth quarter. This increased our net worth to $60.3 billion.

Improving Access to Equitable and Sustainable Housing
Now, let me take a step back and highlight some of what we accomplished last year. Our efforts were guided by our updated strategic plan that is designed around two core pillars. One, to improve access to equitable and sustainable housing, and two, to enhance our financial and risk positions.

Let me start with some of the things we did to improve access to equitable and sustainable housing. At Fannie Mae, we want to reduce the number of what we call "credit-invisible" consumers. We also want to reduce cost burdens to homeownership. These are obstacles that disproportionately affect low- and moderate-income and historically underserved households.

Some of our actions included: Introducing our positive rent payment pilot. This allows renters to build their credit histories and improve their credit scores by incorporating their on-time rent payment data into their credit profiles. And, we celebrated one year of our groundbreaking change to incorporate a history of on-time rental payments in the mortgage application process, helping eligible renters qualify for a mortgage. In addition, we launched a special purpose credit program pilot, which allows a limited number of lenders who serve first-time homebuyers residing in majority Black census tracts to help with down payment assistance and closing costs.

We also published market research on important topics like housing supply, the costs of homeownership, appraisal bias, and consumers' awareness of flood risk. And we've shared new information with investors, including launching mission-oriented disclosures on our single-family mortgage-backed securities and publishing the company's first-ever corporate Environmental, Social, and Governance report.

Enhancing Our Financial and Risk Positions
Our second strategic core pillar — to enhance our financial and risk positions — is equally key, so that we can support a liquid, stable market through all economic cycles consistent with our mission. This means ensuring that we are financially secure, can earn investable returns, and that we manage risk to the company and the housing finance system. That is why we have developed a foundation of sound underwriting and loan quality standards and continue our investments in technology.

The effective loss mitigation tools we have developed to support homeowners in times of financial hardship also help to manage our mortgage credit risk. And our credit risk transfer program provides an additional way to manage potential losses in times of stress.

Last month, we announced pricing changes designed to strengthen our safety and soundness and to improve our capital position over time. All of these efforts, and continued investments in our people, help to make us and the housing finance system more resilient and better prepared for what the future may bring. They are also aimed to help us generate strong financial results and continue to build our net worth.

Looking Ahead
The last thing I'll touch on before turning it over to Chryssa is our 2023 outlook. We currently expect the economy to enter a modest recession in the first half of the year, resulting in an increase in unemployment by year-end. This could increase mortgage delinquencies. In addition, mortgage rates might decline modestly, but we believe they will remain well above the lows seen in 2020 and 2021. We also expect single-family and multifamily housing starts to further decline compared with 2022 due to the economic constraints already discussed. At the same time, we forecast that home prices will decline 4.2% in 2023, compared to the 1.5% decline we predicted last quarter. We believe the combination of declining home prices and lower mortgage rates, coupled with household income growth over time will, over the long term, place the housing market in a recovery. In multifamily, we anticipate rent growth of 1.5% in 2023, a more normalized pace compared to the growth we saw in 2022. However, by our measure, affordability is unlikely to return to pre-pandemic levels for multiple years.

We will continue to share with you how our outlook might change as developments in the housing market and the broader economy unfold. With that, I would like to turn it over to Chryssa.

Chryssa C. Halley:

Full-Year Results
Thank you, Priscilla. Good morning. Today, we announced 2022 net income of $12.9 billion, a decrease of $9.3 billion, or 42%, year-over-year, due to an increase in our allowance for loan losses largely driven by expected future home price declines. As Priscilla described, we saw a turn in the single-family housing market in 2022, with home price declines of 1.4% in the second half of the year. This is the first time two consecutive quarters of declines were observed since the beginning of 2012.

2022 net revenues remained strong at $29.7 billion, compared to the $29.9 billion of net revenues we reported in 2021. Base guaranty fee income rose 12.8% year-over-year, to approximately $19.4 billion, due to growth in our single-family and multifamily books coupled with an increase in our average charged guaranty fee in single-family. In addition, income from our other investments and retained mortgage portfolios increased to $3.0 billion, from $941 million the prior year, thanks to increasing yields. These increases were offset by a 37% year-over-year decline in amortization income, to $7.1 billion, due to the higher interest rate environment, which resulted in lower prepayment volumes.

We recorded a $6.3 billion provision for credit losses in 2022, compared to the $5.1 billion of benefit for credit losses we recorded in 2021. The single-family provision was primarily driven by decreases in forecasted home prices. This is compared to 2021, where we recorded a benefit for credit losses due in large part to the record levels of actual home price growth we saw that year. The multifamily provision, however, was concentrated in the fourth quarter, primarily driven by an increase in expected credit losses on our seniors housing portfolio.

Fourth Quarter Results
Turning to our quarterly results, as Priscilla mentioned, we reported fourth quarter net income of $1.4 billion, a 41% decrease compared to $2.4 billion in the previous quarter, driven by an increase in our allowance for loan losses. We recorded $7.1 billion of net revenues in the fourth quarter, compared to $7.2 billion in the third quarter. Base guaranty fee income remained steady quarter-over-quarter, at approximately $4.8 billion.

We recorded a $3.3 billion provision for credit losses, reflecting further forecasted deterioration in the housing market in single-family, and a $900 million provision for our multifamily seniors housing portfolio, where further rate increases in the second half of the year added pressure to the adjustable-rate mortgage loans in a sector that had already been hit hard by COVID and higher inflation.

Although our serious delinquency, or SDQ, rates on both our single-family and multifamily books remained low as of year-end, our allowance reflects our current expectations of future loan losses on our book of business. Now, let me turn to our segments.

Single-Family Results
Starting with Single-Family, we reported $10.8 billion in net income last year, a decrease of $8.4 billion, or 44%, compared to 2021, mainly driven by a provision for credit losses. With this provision, we've increased our single-family allowance for loan loss coverage ratio to 26 basis points as of year-end, from 15 basis points as of the end of the prior year. Single-family acquisitions decreased by 55% year-over-year, from $1.4 trillion in 2021 to $615 billion in 2022, given the higher interest rate environment. Single-family acquisitions were $85 billion in the fourth quarter, a 28% reduction compared to the third quarter.

Turning to our full single-family guaranty book, the overall credit characteristics remained strong, with a weighted-average mark-to-market loan-to-value ratio of 52% and a weighted-average credit score at origination of 752. Our single-family SDQ rate as of year-end was as low as it was in February 2020 just before the start of the pandemic, at 65 basis points. This is compared to 125 basis points as of year-end 2021.

Lastly, 2022 was a record issuance year in single-family credit risk transfer. We transferred a portion of the credit risk on more than $535 billion of mortgages through the program. As a result of our efforts, as of the end of last year, 42% of our single-family guaranty book was covered by credit enhancement, up from 34% at the end of 2021.

Multifamily Results
In Multifamily, we earned $2.2 billion in net income for the year, a decrease of $896 million, or 29%, compared to 2021. This takes into account a $52 million net loss in the fourth quarter that was driven primarily by the $900 million provision for loan losses on our seniors housing portfolio that I previously mentioned. Our seniors housing portfolio represents 4% of our overall multifamily guaranty book, with an unpaid principal balance of $16.6 billion as of year-end, and approximately 40% of those loans are adjustable-rate mortgages. A sharp rise in interest rates during the latter half of 2022 put additional stress on this portfolio, which had already been negatively impacted by the COVID pandemic and inflation.

Given the allowance build, our multifamily allowance for loan loss coverage ratio increased to 43 basis points as of year-end, from 17 basis points as of the end of the prior year. In 2022, our multifamily loan acquisition volumes were flat to 2021, at just over $69 billion, and increased our multifamily book to $440 billion as of year-end.

Based on our analysis, we met both mission requirements set forth by FHFA for last year, which required that at least 50% of our 2022 multifamily business volume focus on certain affordable and underserved market segments, and at least 25% be affordable to renters earning 60% or less of area median income.

The credit quality of our multifamily guaranty book as a whole remained strong, with a weighted average original loan-to-value ratio of 64% and a weighted average debt service coverage ratio of 2.2 times. Although we expect the level of seriously delinquent seniors housing loans could rise, as of year-end, less than 1% of our seniors portfolio was seriously delinquent, and SDQ rates on our multifamily book as a whole remained low, at 0.24%, compared to 0.42% as of the end of 2021.

I'll also note that nearly all of our multifamily loans are covered by our DUS® loss sharing model.  In addition, about one-quarter of our multifamily loans are covered further by back-end credit risk transfer transactions.

Capital
As it relates to capital, as of the end of the year, we remain significantly undercapitalized, with a $258 billion shortfall to the amount of capital needed to be fully capitalized.

Outlook
I'll now expand on a few of Priscilla's remarks about our 2023 forecast and impacts to Fannie Mae. These factors — particularly a modest recession and home price declines — will continue to put pressure on the housing market. We expect 2023 single-family market originations of $1.7 trillion, a 29% decrease from 2022, with approximately 78% of that activity expected to come from purchase originations. 

We predict that 2023 multifamily market originations will be between $385 [billion] and $400 billion, a decrease from 2022 volumes, given that interest rates for multifamily lending are expected to be higher on average in 2023 compared to 2022, and due to weakening demand from property investors. Fannie Mae's multifamily acquisition volume cap for 2023 is $75 billion.

We remain confident in our underwriting and risk management practices as we move through this cycle. In 2023, we expect revenues will continue to remain strong, thanks to steady base guaranty fee income and expected increases in interest income on our other investments portfolio. We also anticipate significantly lower amortization income compared with 2022, driven by our expectation that refinancing activity will remain low as we expect most single-family loans in our guaranty book will continue to have interest rates significantly lower than current market rates.

In fact, approximately 75% of our single-family book as of the end of last year had an interest rate below 4%, over 200 basis points lower than the current average interest rate for a 30-year fixed-rate mortgage. Accordingly, even if interest rates decline meaningfully from current levels, most of the loans in our single-family book will not be incentivized to refinance.

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. With that, I'll turn it back to you, Priscilla.

Priscilla Almodovar:

Thank you, Chryssa. We expect there will be economic headwinds in 2023 and that housing affordability will continue to remain a challenge for many homebuyers and renters. We also know that Fannie Mae has the capabilities and dedication to help provide liquidity and stability, and to support homebuyers and renters throughout all economic cycles. Thank you for joining us today. We look forward to speaking with you next quarter.

Fannie Mae Moderator:

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