Fannie Mae Third Quarter 2023 Financial Results Conference Call

Fannie Mae Moderator:
Good day, and welcome to the Fannie Mae Third 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 third 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; 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 Third 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 We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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 touch briefly on the macro environment before reviewing our quarter's financial and mission performance. After that, our Chief Financial Officer, Chryssa Halley, will discuss our quarterly results and economic outlook in more detail.

Macroeconomic Conditions
Economic data throughout the year has been stronger than expected, including in the third quarter, with GDP growing at a 4.9% annualized pace. While wage growth moderated, job growth remained robust. Inflation remains nearly two percentage points higher than the Federal Reserve's target rate, and the 10-year Treasury ended the quarter at 4.6% and continued to rise.

That is why in housing, this year continues to remain a tale of two markets. It's a good market for homeowners who locked in low mortgage rates and have more equity in their homes due to rising home prices. Yet, for homebuyers, especially consumers looking to buy their first home or those of modest means, it's a tough market — one that is burdened by high home prices, limited inventory, and high mortgage rates. In fact, for the third straight month, median existing home prices were up from a year ago, and the 30-year fixed-rate mortgage rate was most recently as high as 7.8%.

Because of these factors, in September, existing homes sales fell, mortgage origination activity continued to be slow, and consumer sentiment to buy a home was the lowest it has been in the history of Fannie Mae's Home Purchase Sentiment Index®.

In the case of multifamily, higher interest rates and general market uncertainty have contributed to a decline in overall market activity and declining property values. And, while the pace of growth has slowed year over year, rents are still at all-time highs. This is yet another example of the affordability challenges that consumers face.

Despite this challenging macroeconomic backdrop, we remained committed to working with lenders to support renters and homeowners while effectively managing risks to our business.

Third Quarter Financial Results
Turning to the quarter, we reported $4.7 billion in net income. Contributing to our net income was a credit reserve release reflecting higher actual and forecasted single-family home prices. As a result, we continue to build our net worth through retained earnings, which increased to just under $74 billion as of the end of September. This increase further bolsters our financial stability and enables us to continue being a reliable source of mortgage credit.

In fact, this quarter, we provided $106 billion in market liquidity. This helped 428,000 households buy, refinance, or rent a home. This included 159,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of area median income. We also helped over 106,000 first-time homebuyers to purchase a home.

Mission Performance
Providing liquidity is only one way Fannie Mae serves the market and works to make it better for everyone. Let me share a few examples. First, we provide educational resources to help renters and homebuyers address challenges they might face on their housing journey. This quarter, for example, we launched a Spanish-language credit course "Strategies for Healthy Credit" on HomeView®, our free online education tool. We also recently refreshed our flood awareness survey that measures consumers' awareness and attitudes towards flood risk and insurance, and we redesigned our flood-related content on FannieMae.com.

Second, we continue to work with our partners to increase the creation and preservation of affordable rental housing. Like we do with our Multifamily Sponsor-Initiated Affordability program, which incentivizes multifamily property owners to voluntarily establish income limits and set aside at least 20% of units as affordable to renters earning up to 80% of area median income for the life of the loan. Earlier this month, we built upon this program by launching our Multifamily Sponsor-Dedicated Workforce housing initiative, which is aimed at conventional workforce housing providers. This program provides a pricing incentive to owners willing, for the life of the loan, to keep rents on at least 20% of units at levels affordable to renters earning up to 80% of area median income, and up to 120% in certain high-cost areas.

And a final example of how we aim to help make the markets serve everyone is the work we continue to do to identify new ways to attract capital to underserved markets. Like what we are doing in Single-Family, where we provide mortgage-backed securities disclosures that give investors insights into our mission activity. This information allows MBS investors to allocate their capital towards populations who have traditionally faced barriers to housing access.

Wrap Up
While today's economic and geopolitical environment are uncertain, Fannie Mae's priorities are clear. We are focused on being a reliable source of liquidity and stability to the U.S. housing finance system. We are focused on making the housing market work better for everyone by advancing equitable and sustainable housing opportunities. And we are focused on strong risk management and ensuring we are financially secure so that we can deliver on our mission. I want to thank our dedicated teams for effectively managing risks while working with our partners across the housing ecosystem to support U.S. renters and homeowners. Now, I'll turn it over to Chryssa to discuss our third quarter financial results.

Chryssa C. Halley:

Third Quarter Results
Thank you, Priscilla. And good morning, everyone.

As Priscilla mentioned, we reported $4.7 billion in net income in the third quarter, a roughly $300 million decrease compared to the second quarter of this year. Our third quarter revenues remained strong at $7.3 billion. We recorded $7.2 billion of net interest income thanks to strong guaranty fees. This is $185 million higher than last quarter's net interest income.

We saw a credit benefit this quarter of $652 million, driven primarily by a release in reserves due to increases in actual and forecasted single-family home prices. This was partially offset by write-offs from loan redesignations due to our intention to sell a portion of the nonperforming and reperforming loans in our retained mortgage portfolio. This is compared to a $1.3 billion credit benefit in the previous quarter that was also driven primarily by home price increases.

Increases in interest rates drove around $800 million in fair value gains, nearly double the fair value gains in the previous quarter. In addition, we recorded a $491 million litigation expense relating to a jury verdict and an award of prejudgment interest for Fannie Mae preferred shareholders in the third quarter.

Turning to a few Single-Family business highlights: We acquired $89 billion in single-family loans in the third quarter, which is flat compared to the second quarter. Given the interest rate environment, the share of our single-family acquisitions that were purchases climbed to 88% — the highest level we've seen for over two decades. Our overall single-family book of business remained strong, with a weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 753. Our single-family serious delinquency rate remained near historically low levels, and as of September 30 stood at 54 basis points — due to current economic conditions including low unemployment, and thanks to our underwriting standards and effective loan workout options for distressed borrowers. As projected, a weakening economy may impact the credit performance of loans in our single-family guaranty book of business, which could lead to an increase in our single-family serious delinquency rate. In the third quarter, we transferred a portion of the credit risk on $49 billion of mortgages through our single-family credit risk transfer programs.

Now, in Multifamily: We acquired $16.4 billion of multifamily loans in the third quarter, which brings our year-to-date acquisitions through September 30 to $42 billion, compared to $51 billion at this time last year. This downward trend is consistent with 2023's lower overall market activity, driven by the uncertain market environment and higher interest rates. Despite declining property values in the multifamily market, the multifamily loans we acquired year-to-date through September 30 had a weighted-average original loan-to-value ratio of 59%. These loans also had a weighted-average debt service coverage ratio of 1.6 times. The overall credit profile of our multifamily book remained strong, with a weighted-average original loan-to-value ratio of 64% and a weighted-average debt service coverage ratio of 2.1 times. We continue to monitor the impacts of rising interest rates on our multifamily book. Rising rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. Roughly 2.5% of our multifamily book is expected to mature through the end of 2024. Rising interest rates will also result in higher monthly payments for borrowers with adjustable-rate mortgages, which may lower their debt service coverage ratios. As of the end of September, adjustable-rate mortgages made up about 10% of our multifamily book. In previous calls, we've discussed our stressed multifamily seniors housing loans, particularly those that are adjustable-rate mortgages. Our multifamily serious delinquency rate increased to 54 basis points as of September 30, compared to 37 basis points as of June 30, largely driven by seniors housing. We are actively pursuing loss mitigation actions when appropriate. We expect that our multifamily serious delinquency rate may decrease as we complete loan workouts, which may resolve their delinquency, or if an appropriate workout cannot be achieved, the loans are foreclosed upon.

Outlook
Before we close out, I'll touch on our current economic outlook. The strong economic growth Priscilla mentioned has reduced the likelihood of the mild recession we have expected next year, but we believe the full weight of the dramatic increase in interest rates has yet to be felt. Mortgage rates, which we currently expect to average 6.8% in 2023, coupled with elevated home prices, will continue to fuel an uneven supply/demand dynamic in housing and put stress on affordability. Given the strong estimated home price growth of 6.9% in the first nine months of the year, we project national home price growth of 6.7% for the full year. Our expectations are based on many assumptions, and our actual results could differ materially from our current expectations.

I invite you to visit our webpages, 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.