Q2 2020 Federal Home Loan Mortgage Corp Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to the Friday Night second quarter 2020 financial results media called at this time all participants are in listen only mode. Later, because that take question answer session and instructions will follow at that time, if anyone should require assistance during the call Brett.

Please press Star then zero under Touchtone telephone I.

I would now that's you know conference over to your host Mr., Jeffrey Markowitz, Senior Vice President Investor Relations and corporate communications.

Good morning, and thank you for joining us for discretion are pretty much second quarter 2020 financial results.

I'm joined today by other companies CEO, David Brickman General Counsel, Ricardo <unk> CFO, Chris Brown in San Diego Jerry Wise.

Before we begin if you'd like to point out the during the call Freddie Mac executives may make forward looking statements based in the set of assumptions about the company's key business drivers and other factors changes in these factors could cause the company's actual results could vary materially from the expectations description of these factors can be found in the company's quarterly report form 10-Q.

Filed today.

Oh, Freddie Mac executives may also discuss non-GAAP financial measures for more information about those measures. Please see our earnings press release and related materials, which are posted on the Investor Relations section Freddie Mac Dot com.

Our commentary today will be limited to business and market topic. Since you know we cannot comment on public policy or legislation concerning Freddie Mac.

Calls being recorded in the replay will soon be available on pretty much dot com, we ask that the call not be rebroadcast or transcriber.

At the end of Mr. Bricklin's prepared comments, we will open the call for questions that pertains to be earnings statement. We just released as a reminder, this calls for the media and only they may ask questions with that I'll turn the call never pretty back CEO David Blackman.

Thank you Jeff Good morning, Thank you for joining our second quarter earnings call.

Today, we will cover three topics in addition to our financial and business results.

First I'll provide an update on our work to help stabilize markets. During the then Doug.

I will then discuss recent key developments on the road to exiting conservatorship.

Finished with our outlook for the month ahead.

Let's start with a response for the pandemic still disrupting hundreds of millions of American lives.

In our last call I provided an update on Freddie Mac's leadership, and helping to stabilize the housing market and the economy, you are support to customers lenders and others impacted my CODI 19.

As many of you know, we created forbearance programs for single family and multifamily borrowers implement the tenants protection and created Flexibilities to ensure social distancing.

In the second quarter, we extended the time the timelines on these programs and introduced a new payment deferral solution, which returned to homeowners post forbearance monthly payment to its pretty cold that amount.

We also introduced a look up tool for renters. So they can determine whether their properties backed by Freddie Mac.

I'm proud of the work we've done we fulfilled our mission and we're playing to counter cyclical roll. The GRC are called onto a plane time crisis.

Our actions combined with other direct relief from the care the act appear to be having a positive impact.

Well much uncertainty remains particularly a significant portions of the care that have expired.

Overall trend in Forbearances has been down since their peak in late May.

Black Knight estimates that as of the May 26 peak, approximately 4.76 million single family borrowers Werent forbearance.

Representing 9% of all loans.

The percentage of GC loans, and forbearance was 7.2.

My last week those figures had improved with approximately 7.8% of all loans and 5.8% of GE a C backed loans in forbearance.

Our assessment based on reporting from Servicers is consistent with these numbers.

As we estimate that more than 115000 borrowers exited forbearance in the second quarter to end the period at 426000.

Approximately 3.75% of Freddie Mac single family loans, Rude forbearance and at least one month past due based on the loans original contractual terms at June Thirtyth.

In multifamily the percentage of four born Freddie Mac loans is even lower.

As of June Thirtyth, 2.4% of loan by unpaid principal balance in our multifamily mortgage portfolio. We're in forbearance.

Approximately 83.5% of which are included Securitizations with credit enhancement provided by subordination.

Well these numbers are better than expected. This crisis is far from over in fact, despite the overall downward trend Black Knight latest weekly Forbearance report represented a slight increase from the week before.

We will continue monitor these indicators and further adjust our policies and practices as necessary.

The hard work, we've done to support liquidity stability and affordability in the market while the one thing the worst effects of the Corona virus have not distract us from our top strategic priority responsibly exiting conservatorship.

Many of you are aware of the milestones you already passed on our way towards that goal.

At page at Bay, and treasuries announcement, the plant and the conservatorship.

Suspension of the net worth sweep as a first major step toward building capital.

And at page assays retention of investment adviser.

In the second quarter, we reached two additional key milestones.

First we selected JP Morgan and its financial advisor to help facilitate Freddie Mac's recapitalization.

We chose JP Morgan is our financial advisor based on its track record and expertise in managing complex equity in capital markets transactions.

They will provide strategic council and perform a range of tasks, including advice and assistance on valuation analysis consideration to potential capital structures and assessment of capital raising alternatives.

Second in May and friendship and we proposed it's at GSV capital.

The comment period for that rule remains open.

We look forward to a final rule that ensures we can continue to put.

God way and that provides an attainable target for exiting conservatorship.

I also want to mentioned that we were very pleased to hire our new Chief Financial Officer, Chris Lounge in the second quarter.

Chris joined US in June from Navios, We spent the last three years as CFO after two decades in banking.

He is a strong addition to our management team and his experience will be invaluable as we begin to consider an eventual capital raise welcome Chris.

Let's turn to our financial results.

Freddie Mac earned $1.9 billion of comprehensive income in the second quarter.

$1.3 billion increase compared with the first quarter was driven by higher investment gains of $1.2 billion. After tax primarily due to higher quoted spreads in the multifamily business, resulting in higher margins.

Combined with fair value gains due to improved spreads.

Well, so lower credit related expense of zero point $3 billion after tax.

Primarily reflecting updated estimates of current expected credit losses in the second quarter.

And also higher net interest income and guarantee fee income of zero point $1 billion after tax.

Looking at capital the company's total equity increased to $11.4 billion at June Thirtyth compared with $9.5 billion at March 30 Onest.

Our single family segment achieved new business activity of $232 billion in the quarter. The most since the third quarter of 2003, and the second highest ever.

Multi family also saw a significant increase with $20 billion of new business activity.

Serious delinquencies increased in the quarter to 2.48% in single family.

Importantly, this includes loans in forbearance for which the borrower has requested and been provided the white to suspend monthly payments.

Multifamily delinquencies effectively held near zero at 0.1%.

However, it is important to note that our multifamily loans in forbearance are not considered delinquent.

As long as the borrower is in compliance with the forbearance agreement, including the agreed upon repayment plan.

Consequently, our reported multifamily delinquency rates exclude these loans.

We continue to deliver on our mission in the second quarter, Freddie Mac provided funding for 827000 single family homes, including 609000 refinancings.

Approximately 48% of home sales made possible or to first time homebuyers.

On the multifamily side, we financed 202000 rental rental units, 95% of which were affordable to families, making 120% or less of area median income.

Overall, we supported the US housing finance system with $253.5 billion a funding in the quarter.

Looking ahead at the state of the economy in housing the impact of the pandemic has been unprecedented.

And as a result, our economic and business forecasts are more uncertain than usual.

A lot depends on the course of the virus and the pace of recovery, especially as some state reintroduce pandemic related restrictions and relief programs expire.

But right now data suggests that the dramatic economic contraction caused by the pandemic bottomed out in mid April.

And the economy appears to be slowly improving.

However, we may indeed see slower growth for a sustained period.

Despite the slow recovery the housing market appears to be relatively healthy and has recovered faster than the rest of the economy.

In the single family market, we've seen purchase applications rebound likely triggered by the lowest average interest rates since Freddie Mac began tracking them in 1971.

To give you an idea about how remarkable the recovery in home buying has been it took 10 years for purchase demand to fully recover from the great recession in this crisis. It did so in 10 weeks.

As you might expect with very low interest rates, we've seen a dramatic rise and refinancings and our economists expect refinance activity stay at high levels through the end of the year.

We expect home sales to fall to 4.8 million in Twentytwenty, and then rebound to 5.6 million in 20 to 21.

Which is still slightly below the 6 million sales we saw in 2019.

We expect expect full year house price growth to slow in 2020 and 2021.

In the multifamily market, we see an uptick in inflows, which indicates there has been some recent acceleration and transaction activity largely being driven by low interest rates.

We saw whence decline and vacancy rates increase over the second quarter.

However, an increase in tenants staying in place and renewing their leases somewhat limited the impact of declining demand on occupancy levels.

Long run supply shortfalls, and strong multifamily fundamentals tell us the drop in demand is a temporary circumstance driven by coded 19.

Largely due to supply shortages affordable housing was already in crisis pre pandemic and pandemic related unemployment and reductions in income are disproportionately affecting renters low income families.

As families of color.

The disproportionate impact to the black community, especially has been obvious.

Black Americans represent 13% of the population.

They account for about 23% of deaths from coated 19.

Due to conditions, largely created but by unequal economic housing environmental and health care systems.

Specifically with regard to housing the census Bureau reports the black homeownership rate is more than 20 percentage points lower than the national average.

Nearly 30 percentage points lower than the white homeownership rate.

Clearly there is much work to be done.

And we it Freddie Mac believe we havent obligation to do it.

Hello heightened awareness of racial injustice, giving rise to a renewed focus on not just access to credit, but on driving meaningful outcomes and addressing the deplorable gap between white and black homeownership rates.

As a majority minority company.

And one so critical to the nation's housing landscape.

Freddie Mac is recommitting to its mission of expanding homeownership opportunities and access to rental housing including for families of color across the United States.

You can expect to hear more from us on our commitments to affordable housing and inclusion diversity as well as other environmental social and governance governance matters in the near future.

Finally, let me end with this.

Last week, Freddie Mac reached the Fiftyth anniversary of our founding.

Rather than celebrate in this challenging time, we chose to reflect on our past and the power we have to change the future.

Urge you to visit our recently launched 50 years of home website to see the profound impact Freddie Mac has had on US housing since its founding in 1970, a year in which we purchased a grand total of eight loans, Yes, just date.

Today, the number of single family homes and quality rental units, we've made possible is closer to 80 million.

Of those 20 million homes, and 5.4 million rental units were affordable to low and moderate income borrowers and renters respectively.

And we've helped 5.6 million families achieve the American dream by purchasing their first tone.

Throughout our journey, we've established a record as an innovator from our very first mortgage backed security in 1971 to today's thriving multifamily in single family credit risk transfer markets.

That is a legacy we are rightly proud of and it is a base on which we can build toward a better future. Both for this company and for the country that gave US I will start 50 short years ago.

Thank you for joining and now I will take your questions.

At this time, maybe I would like to ask a question. Please press Star then number one and our telephone keypad, we'll pause for just a moment tick up how they can a roster.

Hi, Ken for any questions. Please press Star then the number of line.

And no questions at this time.

That does conclude today's conference. Thank you for your participation you may now disconnect.

Okay.

[laughter].

[music].

[music].

[music].