Fannie Mae Second Quarter 2022 Financial Results Media Call

Fannie Mae Moderator:

Good day, and welcome to the Fannie Mae Second Quarter 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 second quarter 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, and their impact on our business and financial results, and the factors that will affect them; 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 second quarter 2022 Form 10-Q, filed today, and its 2021 Form 10-K, filed February 15, 2022, 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We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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 President and Interim Chief Executive Officer, David C. Benson, and Fannie Mae Chief Financial Officer, Chryssa C. Halley.

David C. Benson:

Welcome and Introduction

Thanks, Pete. Welcome, and thank you for joining us as we share our second quarter financial results.

I'll provide brief opening comments, and then our Chief Financial Officer Chryssa Halley will cover our second quarter results in more depth.

Our net income in the quarter was $4.7 billion, compared with $4.4 billion in the previous quarter.

These earnings resulted in an increase to our net worth to $56.4 billion.

Our financial results came in the context of notable trends that are having significant impacts on the housing economy.

June data showed the consumer price index growing at 9.1% year-over-year, the highest reading in decades.

Economic activity continued to slow, with second quarter GDP declining by 0.9%, after a 1.6% decline in the first quarter.

The Federal Reserve has initiated and communicated its intent to continue to move short-term interest rates higher, as well as reduce its balance sheet.

In the second quarter, the 10-year Treasury and 30-year fixed-rate mortgage rates increased by 67 basis points and 103 basis points, respectively, continuing a trend that began in earnest at the start of the year.

Although single-family housing starts are still above their 2019 average, they have declined from their 2020 peak.

We estimate that home prices nationally rose 19.4% year-over-year in the second quarter.

At the same time, home sales continued to decline in the second quarter.

Higher home prices and higher mortgage rates have negatively affected affordability.

Affordability pressures continue to grow in the multifamily space, as well.

Vacancy levels in the market remained stable but tight, with the more affordable Class B and C supply the most constrained. We now expect annual rent growth across all classes to be in the 6.0% to 7.0% range in 2022.

All of which is to say, housing continued to get more expensive, making it particularly difficult for first-time homebuyers and low- and moderate-income renters.

Although our mortgage acquisitions continued to slow, driven by the steep drop in refinancing volume, we continued to deliver on our liquidity mission for the mortgage market, providing $191 billion in financing to the Single-Family and Multifamily markets.

This included $111 billion in financing for home purchase mortgages, nearly half of which were for first-time homebuyers.

It also included financing for 156,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of Area Median Income.

Looking Ahead

Looking ahead, we now expect that a modest recession is likely to occur beginning in the first quarter of 2023.

As we noted last quarter, we do not expect a downturn that matches the severity of 2008 in terms of its impact on housing or our financial results — mostly due to better overall credit quality, less leverage, and the maturity of our loss mitigation practices.

We project home price growth to moderate in the second half of 2022 and in 2023. It is also possible that some regions of the country may experience home price declines in the latter half of 2022.

We expect mortgage rates to stay elevated through the end of 2022 compared with rate levels at the start of the year.

Higher rates will worsen affordability and dampen demand. This, coupled with low inventory, will constrain home sales for the remainder of this year.

Although Fannie Mae enters this period of uncertainty from a relative position of strength, we are fully aware that we are in a highly unusual and potentially volatile global and economic environment.

Therefore, we must expect the unexpected.

We will continue to focus on managing our risks and fulfilling our mission to be a reliable source of affordable and sustainable financing.

And we remain committed to helping renters and homeowners have access to housing solutions that meet their needs.

So now, I will hand it off to our CFO Chryssa Halley for more details about our financial results.

Chryssa C. Halley:

Introductory Remarks and Q2 Financial Results

Thank you, Dave. Our second quarter results remained strong. As Dave mentioned, we reported $4.7 billion of net income.

Compared with the first quarter of 2022, net income increased slightly, by nearly $250 million, primarily due to offsetting impacts from rising interest rates during the period.

Net interest income of $7.8 billion was the largest contributor to our results, and, with an increase of just over $400 million, was the largest contributor to changes in our results relative to the first quarter of 2022.

Higher income on investments as interest rates rose during the quarter contributed to an increase in net interest income from our retained portfolio and other investments portfolio.

Net interest income from our guaranty book of business decreased slightly, due to a decline in net amortization income driven by reduced refinancing activity, partially offset by higher base guaranty fee income.

Turning to credit, we recognized about $250 million of credit-related expense in the second quarter of 2022, compared with the approximately $200 million credit-related expense we recorded in the first quarter of 2022. The second quarter's expense was driven in part by an increase in interest rates that was partially offset by home price growth. I'll speak first to the benefit from home prices, and then to the impact on the provision from interest rate increases.

While home price growth was strong in the second quarter of 2022 at an estimated 5.7%, the positive impact on our allowance was reduced by some recent market indicators that suggest home price growth may be moderating at a faster pace than we anticipate.

Further, the rise in actual and projected interest rates in the second quarter of 2022 more than offset the benefit from home price growth. Increases in interest rates reduce the expected volume of prepayments and extend the expected life of previously modified loans accounted for as troubled debt restructurings, or TDRs, as it is less likely these loans will refinance.

I'd like to highlight a few additional notable trends. First, Single-Family.

The higher mortgage interest rate environment drove lower single-family acquisition volumes quarter-over-quarter. We acquired $172 billion of single-family loans in the second quarter of 2022, a 28% decrease compared with the first quarter of 2022.

We saw a continued shift in our acquisitions to a greater share of purchase loans, as higher rates dampened demand for mortgage refinancings. In fact, the single-family share of purchase acquisitions in the second quarter reached 64%, its highest quarterly level since the first quarter of 2019.

As the share of home purchase acquisitions increased, we saw a relative increase in the percentage of our single-family loan acquisitions with loan-to-value ratios over 80%, from 24% of acquisitions in the first quarter of 2022 to 34% in the second quarter of 2022.

Acquisition FICO® scores averaged 746 in the second quarter of 2022, compared with 748 in the first quarter of 2022.

Average charged guaranty fees on acquisitions, net of TCCA, increased 2.8 basis points to 51.7 basis points, reflecting the shift in the credit profile of the loans we acquired.

Now, let's turn from our recent acquisitions to our overall book. Our single-family guaranty book of business remains strong, with a weighted average mark-to-market loan-to-value ratio of 50% and a weighted average credit score at origination of 753 as of the second quarter.  98% of the loans in our single-family guaranty book were acquired in 2009 and forward, benefiting from underwriting, technology, and quality control improvements that have made the housing system, and Fannie Mae, stronger.

Our Single-Family serious delinquency, or SDQ rate, dropped to 81 basis points as of the second quarter, compared with 101 basis points as of the end of the first quarter.

As we continue to manage the credit risk on our single-family book of business, Fannie Mae entered into six credit risk transfer transactions during the quarter, referencing $163 billion in unpaid principal balance at the time we entered the transactions.

Now, let's touch on Multifamily.

We acquired $18.7 billion of multifamily loans in the second quarter of 2022, an increase of $2.7 billion compared with the first quarter of 2022.

The bulk of these acquisitions provided vital support for both workforce and affordable housing. Approximately 93% of the multifamily units we financed in the second quarter of 2022 that were potentially eligible for housing goals credit were affordable to households earning at or below 120% of the median income in their area.

As of the end of the second quarter, approximately $43 billion remained under our $78 billion multifamily volume cap for 2022.

The credit profile of our multifamily book of business also remained strong, with a weighted average original loan-to-value ratio of 65% and a weighted average debt service coverage ratio of 2.2 times.

Our multifamily SDQ rate declined to 34 basis points as of June 30, 2022, from 38 basis points as of March 31, 2022. The multifamily SDQ rate, excluding loans that have received a forbearance since the start of the pandemic, remained at 3 basis points as of June 30, 2022.

Next, I'd like to touch on our capital position.

As of June 30, 2022, we had a $262 billion shortfall to the amount of capital needed to be fully capitalized, a $10 billion improvement from March 31, 2022. This improvement was primarily the result of an increase in our retained earnings and lower capital requirements due to single-family CRT issuances and home price appreciation.

It's important to note that the calculation of available capital under the enterprise regulatory capital framework excludes the stated value of our senior preferred stock and deferred tax assets, both of which are included in the calculation of our net worth.

Outlook

Earlier, Dave shared some observations on the overall economy. I'd now like to address what these macroeconomic factors may mean for Fannie Mae.

As a result of higher mortgage interest rates and inflation continuing to weigh on affordability, we revised downward our forecast for 2022 single-family mortgage market originations. We noted in our housing forecast published in July that we expect single-family mortgage market originations of $2.5 trillion, a 43% decrease from 2021, with nearly 70% of that activity expected to come from purchase originations.

We have adjusted our multifamily market originations estimate down to $425 billion, from $475 billion, based on higher rates, current sales trends, and an anticipated slowdown in the pace of delivery of new units due to ongoing supply chain issues, labor shortages, and volatile material prices. Competition for multifamily financing remained robust during the first half of 2022, but may begin to moderate during the second half of the year due to higher interest rates and generally challenging market conditions. These conditions may also put pressure on our multifamily business volumes and guaranty fees.

Finally, as we saw in the second quarter of 2022, we continue to expect lower amortization income in 2022 compared with 2021, driven by reduced refinancing activity as higher interest rates make refinancing attractive to fewer homeowners.

We also continue to expect a shift from significant credit-related income in 2021 to modest credit-related expense in 2022, driven by the higher rate environment and expected moderation in future home price growth.

We expect those factors to result in lower net income in 2022 compared with 2021.

Closing Remarks

Before I turn it back over to Dave, I'd like to mention a new resource we recently made available to the market.

In the second quarter, we began to publish Fannie Mae's Refinance Application Level Index, or RALI. This weekly series is timely given the recent shifts in refinance activity.

The RALI, available on our website, sources data from our automated underwriting system, Desktop Underwriter®, to provide the market with timely, comprehensive, and ongoing tracking of single-family refinance activity and historical trends.

We hope you find this new tool useful.

And as a reminder, on our webpages, along with today's filing, you will find our quarterly financial supplement providing additional insights into our single-family and multifamily books of business.

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

David C. Benson:

Thank you again for joining us. We look forward to speaking with you again next quarter.

Fannie Mae Moderator:

Thank you, ladies and gentlemen. That concludes today's call. You may disconnect.