Fannie Mae Second Quarter 2024 Financial Results Conference Call

Fannie Mae Moderator:
Good day, and welcome to the Fannie Mae Second Quarter 2024 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 2024 financial results. Please note this call includes forward-looking statements, including statements about Fannie Mae's expectations related to economic and housing market conditions; the future performance of the company's book of business; and the company's business plans and their impact. Future events may turn out to be very different from these statements.

The "Forward-Looking Statements" section in the company's Second Quarter 2024 Form 10-Q, filed today, and the "Risk Factors" and "Forward-Looking Statements" sections in the company's 2023 Form 10-K, filed on February 15, 2024, 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 We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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 Chief Executive Officer, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Chryssa C. Halley.

Priscilla Almodovar:

Welcome, and thank you for joining us. I'll start by spending a few minutes on the economic environment before speaking to our financial and mission performance for the second quarter of 2024. After that, our Chief Financial Officer, Chryssa Halley, will discuss our quarter results in more detail.

Macroeconomic Conditions

Now, turning to the economy. While inflation slowed in the second quarter, a "higher for longer" interest rate environment continued as the Fed has made clear that incoming data will determine the pace of rate cuts. The 30-year fixed-rate mortgage rate averaged 7% during the quarter. And we estimate that home prices increased 3% during the quarter, and 5.2% since the start of the year.

Affordability concerns, together with a low inventory of homes for sale, continue to limit the number of buyers willing and able to buy a home, even as listings have begun to rise. You can see this in our July Home Purchase Sentiment Index®, where only 19% of consumers say that it is a good time to buy a home. In many parts of the country, affordability remained a challenge for renters, too. Nationally, we estimate rents grew about 100 basis points in the second quarter, compared to 25 basis points in the first quarter.

Our economists expect that similar affordability challenges will persist for the remainder of the year.

Second Quarter Financial Results

Now, turning to our second quarter financial results, we reported $4.5 billion in net income, compared to $4.3 billion in the first quarter. As a result, we continued to reduce our capital shortfall and build our net worth. Our net worth reached $86.5 billion, further strengthening our financial stability.

We provided $95 billion of liquidity to the single-family and multifamily markets in the second quarter. This helped 330,000 households buy, refinance, or rent a home. This included approximately 72,000 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 helped 108,000 first-time homebuyers to buy a home.

Mission Performance

I'm proud of this work and our many efforts to advance the nation's housing market. This includes publishing informative research and insights. For example, we recently refreshed our Mortgage Understanding Study, last completed in 2018. Today's market is very different — and tougher for homebuyers. Our study shines a light on consumers' thoughts about homebuying, what they know about today's mortgage process, and misconceptions they may have. Two key findings are: one, while the percentage of consumers who feel it is a "good time to buy" a home is historically low, the dream of homeownership remains high. And two, the knowledge of what it takes to qualify for a mortgage is mixed. This is a call to action for all of us to continue to work together to make the mortgage process clearer, simpler, and smarter, and to further support consumers in their path to homeownership through outreach and innovation. That's why Fannie Mae continues to innovate to reduce key obstacles that many consumers face, such as limited credit history and high up-front costs.

In addition, we continue to advance innovative ways to connect global capital to U.S. housing. In the first half of this year, we issued over $5 billion in Single-Family Social Bonds and over $4 billion in Multifamily Social Bonds. These bonds help mortgage-backed security investors allocate their capital in support of affordable housing and underserved borrowers and markets. I encourage you to learn more about our work, which is detailed in our 2023 Corporate Responsibility & Impact Report we released earlier this month.

Wrap Up

Our actions to provide liquidity, stability, and affordability to the U.S. housing market are grounded in our mission and made stronger by our focus on risk and controls. And our improved financial stability enables us to be a reliable source of mortgage credit for America's homeowners and renters.

Before I turn it to Chryssa, I want to thank my colleagues across Fannie Mae who come to work every day with a shared commitment to our mission. Now, Chryssa will address our quarter two results in more detail.

Chryssa C. Halley:

Second Quarter Results

Thank you, Priscilla, and good morning.

As Priscilla mentioned, we reported $4.5 billion in net income in the second quarter, a $164 million increase compared to the first quarter of this year. Our second quarter revenues remained strong at $7.3 billion, thanks to healthy guaranty fee income.

We saw a benefit for credit losses this quarter of $300 million compared to the $180 million benefit we recorded in the first quarter. This was driven by a release in single-family reserves partially offset by an increase in multifamily reserves. The reduction in single-family reserves was primarily due to increases in actual and forecasted single-family home prices, partially offset by a provision on newly acquired single-family loans. The increase in multifamily reserves was due primarily to continued declines in actual and near-term projected property values and the impact of new 30-day loan delinquencies.

In our Single-Family business, we acquired $86 billion of single-family loans in the second quarter. This was a 38% increase compared to the prior quarter, consistent with seasonal purchase activity. Despite this increase, our acquisition volumes remained low, reflecting low overall market activity and increased competition. Not surprisingly, given the interest rate environment, 87% of these acquisitions were purchase loans. The credit profile of our single-family acquisitions in the second quarter remained healthy, with a weighted average original loan-to-value ratio of 78% and a weighted average credit score of 759. Further, the credit profile of our overall Single-Family book remained strong, with a weighted average mark-to-market loan-to-value ratio of 50% and a weighted average credit score at origination of 753. Our single-family serious delinquency rate remained near historically low levels as of June 30, at 48 basis points, compared to 51 basis points in the prior quarter. A slowing economy may impact the credit performance of loans in our Single-Family guaranty book, which could lead to an increase in our single-family serious delinquency rate.

Turning to single-family credit risk transfer, we executed four transactions in the second quarter between our Connecticut Avenue Securities®, or CAS, and Credit Insurance Risk Transfer™ programs, transferring a portion of the credit risk on approximately $65 billion of unpaid principal balance at the time of the transactions. In Q2, we also repurchased certain CAS notes and terminated two CAS deals that provided minimal credit protection, reducing lifetime expenses associated with these transactions. We paid $363 million in premiums during the quarter on our outstanding single-family credit risk transfer transactions.

In our Multifamily business, we acquired approximately $9 billion in multifamily loans this quarter, bringing our 2024 multifamily acquisitions through June 30 of this year to over $19 billion, compared to approximately $25 billion in the first half of 2023. This decline reflects low overall multifamily market volumes and increased competition. Our overall Multifamily book had a weighted-average original loan-to-value ratio of 63% and a weighted-average debt service coverage ratio of 2 times. In the second quarter, multifamily property values continued to decline. According to data from the MSCI Real Assets Commercial Property Price Index, multifamily property values declined nearly 20% from the peak in July 2022 to June 2024 and are now back to the levels last seen in 2021. This is compared to the 19% decline from July 2022 to March 2024 that we mentioned last quarter. We continue to monitor the impacts of elevated interest rates on our Multifamily book. Higher rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. While our near-term maturities remain low, market maturities are expected to be elevated, which could put additional pressure on the multifamily market. Roughly 1.2% of our Multifamily book is expected to mature in 2024, and approximately 3.4% is expected to mature in 2025. Our multifamily serious delinquency rate remained at 44 basis points in the second quarter. We expect our multifamily serious delinquency rate to increase in the near term due to a portfolio of approximately $600 million of adjustable-rate conventional loans that we anticipate will become seriously delinquent.

Outlook

Lastly, I'll touch on our current economic outlook. Our economists currently expect two rate cuts from the Federal Reserve later this year. However, they do not forecast a ramp-up in housing activity. For this to occur, they think the market will need to see some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgages rates to bring affordability within range of many homebuyers. Our current forecast is that home prices will rise 6.1% in 2024, up 1.3 percentage points from last quarter's projection. We expect single-family mortgage originations to grow from $1.5 trillion in 2023 to approximately $1.7 trillion in 2024, with purchases making up 80% of single-family mortgage originations this year. 2024 multifamily market origination volumes are now expected to be between $245 billion to $315 billion with a baseline of $275 billion. This is not much different from our estimated $265 billion in multifamily volumes for 2023, but down significantly from $480 billion in 2022.

We believe that with continued high interest rates, elevated new supply completions, and higher-than-average vacancy rates, multifamily sales activity will remain subdued in the near term, which could result in additional declines in multifamily property values over the short term. Over the longer term, however, we expect sales and valuations will improve due to expected improvements in multifamily housing market fundamentals stemming from positive demographic trends and ongoing job growth. We expect rent growth to remain below historical averages, in the 1% to 1.5% range in 2024, as a result of elevated new construction completions and many renters dealing with higher levels of consumer debt.

Our expectations are based on many assumptions, and our actual results could differ materially from our current expectations. I invite you to visit fanniemae.com, where you'll find 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.