Q2 2020 Federal National Mortgage Association Earnings Call
Ladies and gentlemen, good day and welcome to the Fannie Mae second quarter 2020 results conference call.
Today's conference is being recorded.
At this time, then I'll turn it over to your host the Kelly Fannie Mae's director of external Communications. Please go ahead Sir.
Thank you and Hello, everyone. Thanks for joining Nazis media call to discuss Fannie Maes second quarter 2020 financial results. Please note. This call may include forward looking statements, including statements related to the impact of the cobot 19 pandemic on the company's business and financial results.
And on that can housing market conditions.
Talk to the company's potential future capital requirements, the company's business plans and strategies and the credit quality and performance of its book future events may turn out to be very different from these statements. The risk factors and forward looking statements sections of the company's second quarter 2020, <unk> form 10-Q filed today and its 2009.
<unk> form 10-K filed February 13, 2020, prescribing doctors that may lead to different results. As a reminder, this call is being recorded by Fannie Mae and recorded maybe posted companies' 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript I'd now like to turn call over time.
Fannie Mae Chief Executive Officer, Q off freighter, and Chief Financial Officer, Celeste Millay Brown.
Thank you beat welcome and good morning.
To start himself with an overview of how we as a company are navigating this historic year.
Then celeste will discuss our latest that look on the economy and the housing market and the drivers of our second quarter results.
I said last quarter, but this was a mission moments are Fannie Mae in the month since this is proven true.
In March that pandemic Forestar business to go remote we did some swiftly demonstrated resiliency of our people and our operations.
The second quarter be assuming economic downturn led to a great. Many homeowners and renters to look football and assistance, which we provided finally, George sports that veteran renewed nationwide protests against police brutality racism.
Let me briefly describe <unk> ongoing responses to these historic events first cobot 19.
In March we began to prepare for what we expected would be a significant shop work sodomy, our customers and borrowers in response to coated we deployed Fannie Mae's homeowner retro assistance tools and took steps to meet the extraordinary liquidity demands of the market.
We spend in single family Foreclosures and work with Servicers to make forbearance plans widely available to borrowers.
As of June 30.
1 million the single family loans in our book of business, we're in forbearance.
The same time, historically low interest rates fuel refinancing at volumes, we have not seen in more than 15 years.
Single family acquisition volumes in the second quarter with the highest you've seen since 2003.
Our presence in the market made it possible for more than 1 million homeowners to purchase a home or refinanced or mortgage at lower rates during the second quarter.
An important component of this volume is community lenders independent mortgage banks credit unions, and small financial choose small financial institutions relied heavily on our whole loan cartilage liquidity they need to serve their customers for many of these lenders Fannie Mae was a stable lifeline at a time of extraordinary uncertainty.
We deployed flexibilities on inspections, and appraisals relied on our digital tools such as income in assets verification to help lenders meet demand in close loans in a remote work environment.
I mean multifamily well some sources of financing are predicting the market multifamily business has been an important source and sustainable financing for affordable workforce housing during the first months pandemic.
We offered forward related forbearance plans for multifamily borrowers acquired those borrowers to agree to certain protections for tenants, including suspending addictions nonpayment right consistent with required of the kiszczak.
We don't pass disruptions have vital that is that borrowers in retrospect timely relevant accurate information on their options. That's why in may we watched over here to help campaign to educate homeowners mentors servicers lenders and multifamily borrowers. This campaign supports and empowers Fannie Mae single family Servicers originators as well as multifamily de west lenders and.
<unk> information tools to help people get through this kinda over.
We're also educating homeowners and renters directly.
Right No your options Dotcom website, which has become a go to source I understand forbearance and other assistance options.
If you're to help pages on Fannie Mae Duck mom and pop up more than 600000 paid Houston's night and the campaign began in homeowners and veterans have you sort of long look up tool and renters resource find or more than 370000 times GYMCL hostile apartment is eligible for hours systems.
Together, our actions are having a positive impact homeowners looking to take advantage of refinancing I found a stable liquid market lenders are able to deliver revising home purchase loans at high volume, even while working remotely and they could help campaign, that's provided vital information to hundreds of thousands of homeowners and restrooms and need.
At the same time, our credit performance. During this period is benefiting from strong underwriting practices. We've had in place for the last 10 years.
To me the three takeaways from the quarter or this one we've built a solid book of business the safety and soundness at its core to you're delivering on our mission to be it was for stability affordability and liquidity during a time turmoil three we're doing all of this winter commercial speed and agility the smoke demands I remain incredibly.
Proud of the performance of our people. During this period. They are taking this mission moment heart producing results for the housing system. However.
Hard reality is that for all the good work Fannie Mae has done so far and wide body. The future is full of challenges.
One of those challenges surely reckoning with our country's legacy of racism at its poison poisonous effects on our society.
Lets say she was close to home if any night.
Not only because it speaks directly to our values have long history as a check in the diversity and inclusion.
Also because housing housing market shift for your basis practices and outcomes speaks directly to our mission and manageable and building a better future for our country.
As I said in my statement of June 11, Fannie Mae's role and housing finance brings with it important responsibilities. We are committed to doing all we can to support the housing finance system is fear of racism, but we also recognize it more needs to be though.
We look forward to partnering with those across the housing sector and got the commitment resources and energy to make lasting change.
Better and we will expect many stakeholders, who rely on Fannie Mae will help us keep that pledge.
For our focus for the rest of 2020 is unchanged.
We'll continue to address the needs of customers in consumers and maintain stability in the housing market, especially by continuing to help homeowners in bankers affected by Cobot 19.
We'll continue to rebuild our capital base upgrade and they safe and sound manner.
It will continue to build our digital mortgage capabilities, which proved themselves during the past few months and which are vitally important to the mortgage industries future.
And we'll continue to build out business around Splunk governance positive social impact and creating opportunities for everyone have access to housing that they can afford.
I'll turn it over Celeste.
Thank you and good morning, everyone.
I'll start off today by discussing our economic outlook and providing an update on the financial impact that we are seeing some covered 19.
Also review the corridor and then touch on a few topics.
Well me reported earnings and late April we have limited data about the pandemic, we estimated the potential financial impact by making assumptions about the progression of the illness and likely effects on our business and financial results.
This quarter, we have a great deal more information to evaluate but there remains a high degree of uncertainty about the pandemics path and wide ranging knock on effects, we're closely monitoring the impact on borrowers.
Progression I'm resurgence of illness.
The effects of government relief and intervention.
Before I get into the details of the quarter. One initial comment of Hughes said I want to touch on its a substantial strides that we and the industry have made and managing risk.
A decade regulatory reform and the adoption of better underwriting standards have created a much healthier mortgage market today, so what existed in the run up to the 2008 financial crisis.
We have spent years strengthening the quality of our book, while supporting our goal of providing financing for sustainable housing.
We believe the quality of our risk management practices has positioned us well to navigate the challenges facing us today.
Do you watch economy officially entered a recession in Q1, driven by the response to cover 19.
Well portions of the economy have reopened regional outbreaks may become the new norm and the extent to which consumers workers and businesses retrench and the coming months is uncertain.
And your lives real GDP fell by 5% in the first quarter and we estimate a further to the kind of 35% into second quarter.
Despite a likely rebound later this year, we expect full year 2020, GDP to fall approximately 4% before returning to growth in 2021.
Got employment rate spiked to nearly 15% in April which we believe will be the peak of this recession. So we may see volatility in the coming months due to an uptick in cases.
And the second quarter Treasury yields remained at or near historic lows, while mortgage Reits out recently below 3%.
We expect them to remain low for the remainder of the year.
Our proprietary home price person home price sentiment index for Hep C increase in June after sharp losses in optimism in April and May.
Well the June survey results suggest favorable conditions for home buying and selling they also show that survey respondents have persistent elevated concerns about job security in the face a record unemployment.
We believe he index may fluctuate in the coming month, depending on the extent to which customers choose to delay or accelerate home buying plans due to the pandemic.
To date, the housing market has held up better than our initial expectations.
As a result of the very low rate environment as well is continued low housing supply we've increased our 2020 home price forecast to over 4% someone asked a minimum near zero in Q1, due primarily to strong growth in the first half of year.
Our view growth in 2020 represents pull forward from future years.
Yeah, that's reduced our longer term home price forecast as we believe there may be a delayed response in home prices due to ongoing economic and labor market Quiett labor market weakness.
We expect existing home sales to grow approximately 25% in the third quarter after declining approximately 20% in the second consistent with the recent upticks and purchase mortgage applications.
We expect full year sales to be around 8% below last years level on the refinance side given strong mortgage applications and continue though rates. We believe that originations will reach nearly 1.9 trillion in 2020, a level eclipsing the last large refinancing wave in 2012.
Based on current mortgage rate, we estimate that approximately 70% of the single family Buck is incentivized to refinance.
Defined as the case when prevailing mortgage rates are at least half a percentage point below the borrowers current rate if a large portion a portion of such loans in our Buck were to refinance this may slow future single family acquisitions, but where would result in an even more stable guarantee book of business.
The pandemic also negatively impacted national multifamily market fundamentals in the second quarter is higher unemployment and economic uncertainty resulted in a weakening of rental and occupancy growth.
Property sales activity continues to be very low, but there are signs that this market is returning.
As of the end of June we estimate that 5.7% of our single family loans based on loan count and 1.2% of multifamily loans based on new PB, we're actively in forbearance.
Since last quarter, we have refined our estimates of forbearance take up rates for both books.
Based on recent economic data and actual forbearance activity in the second quarter. We now expect to reach for Barents take up rate of 12.5% of single family and 10% of multifamily.
Well, we anticipate fewer lounge entering forbearance versus our expectations at the end of April the profile of those loans is worse than previously expected.
Our analysis of forbearance take up rates and outcomes will continue to evolve based on the path of the pandemic and its effect on economic activity.
Since the onset of the pandemic approximately 1 million of our single family loans have entered forbearance. However, we believe that in.
Got some of the borrowers entered into forbearance preemptively in case of economic hardship around 15% of borrowers who entered for Barents. This year has since exited well, 25% for single family loans and forbearance as of June 30 remained current.
Single family loans with a lower credit quality characteristics are more likely to enter forbearance at the end of second quarter four loans actively in forbearance, 21% had a FICO score below sixeighty as compared to 10% for all single family loans in our book and 18% had a more.
To market loan to value ratio greater than 80% as compared to 13% for the total book.
For multifamily approximately 280 lunch with you PB, a 4.3 billion weren't forbearance at quarter end.
We have updated the multi pay multifamily forbearance program by extending relief from most borrowers experience been experiencing financial hardship for an additional three months to six month.
Repayment plan guidance has been extended to 24 months versus the original 12.
For multifamily seniors properties have been impacted disproportionately driven by increased Tobin related operating expenses as well is limits on new tenants. We have also seen forbearance higher forbearance rates and student housing as most university shifted to online learning in the spring.
Certain and uncertainty about in person classes in the fall domain.
Forbearance rate in seniors and student properties were 11% and 3% respectively at quarter end.
The overall forbearance rate for multifamily was 1.2%.
Seniors and students properties represented less than 10% of the U.P.B. of our most multifamily Buck.
As a result of the economic dislocation of co bid are serious delinquency rate or ft cure rate at quarter end and single family increased by almost 200 basis points from the first quarter to 265 basis points and multifamily by 95 basis points to 100 Boe.
At this point, excluding loans and forbearance, the SBQ rate for single family and multifamily loans at quarter end would have been 59 nine basis points respectively.
For our allowance our updated analysis the expected impact of cold It was relatively flat when compared with a 4.1 billion allowance impact in the first quarter.
While the outlook for forbearance take up rates is lower as I mentioned this change was offset by worse expectations regarding credit profile of loans entering forbearance.
As we received more data our allowance for credit losses could increase or decrease in coming quarters.
Let me update you on the application of our non accrual policy as it pertains to colvin related loans and forbearance.
Normally after two months of delinquency, we stop accruing interest income on loans and reverse out previously accrued interest however, pursuant to inter agency accounting guidance issued in the second quarter, we updated the application of our non accrual policy for cobot affected loans to accrue interest for.
To six months for both single family in multifamily delinquent loans.
Wellington Forbearance beyond six months, we will continue to accrue interest income only at collection continues to be reasonably assured.
Updated application of the policy also requires the establishment of an allowance for expected credit losses on the accrued interest which was approximately 200 million at quarter end, we expect if the allowance to grow as their population of delinquent loans increases and loans extend time and forbearance.
We expect that a subset of loans in forbearance will modify or default and we'll need to be purchase out of MBS Trust and expect to begin making p. and I payments. After four months to fund these purchases and payments, we have and will continue to increase our liquidity through the issuance of additional debt, which will decrease the inc.
Come on none or retain portfolio.
Turning now to our second quarter financial and.
We earn comprehensive income of $2.5 billion up 2.1 billion from the first quarter, primarily due to lower credit related expenses.
In the first quarter credit related expenses were driven by a 4.1 billion dollar increase in the allowance for loan losses due to the economic dislocation caused by cobot.
The allowance was materially unchanged in the second quarter.
Our net worth reached 16.5 billion at the end of June.
In a single family business, our market share of single family mortgage loan securitized by the G fees was 61% in a second quarter compared to 59% in the first quarter.
Single family acquisitions of 350 billion in the second quarter increased by 84% quarter over quarter, driven by a 137 billion dollar increase in refinance volume.
This is the highest level of refinance volumes in any quarter since the third quarter of 2003.
The higher share refinance acquisitions drove improvement overall credit profile of our single family acquisition.
The average guarantees he on acquisitions net of TCC I found nearly three basis points to 47 basis points in the second quarter, driven by an improvement in the credit profile.
Our average single family conventional guaranteed book of business grew by over 50 billion quarter over quarter to reach more than three trillion and the second quarter.
For multifamily our share of GNC mortgage acquisitions was 49% in the second quarter.
Multifamily volume and Q2 was $20 billion, bringing our total acquisition volume against Africa Phase five quarter volume cap to 52 billion, leaving 48 and capacity through the end of 2020.
The multifamily, but grew nearly 4% in the corner, while the credit quality of the acquisitions remain strong.
In Q2, new multifamily business acquisitions had an average loan to value ratio of 65% and an average actual debt service coverage ratio of 2.2 times.
Our capital requirement under FH assays Conservatorship capital framework was approximately 88 billion in a second quarter up from 82 in the first.
Single family and multifamily credit risk capital, both increased due to growth and the bulk of businesses. Additionally, our single family CRT benefit declined during the quarter due to the strong refinance environment and the cessation of issuance.
During the quarter after each of say provided updated updated guidance on the capital treatment for single family loans, and forbearance, which provides some capital relief consistent with actions taken by bank regulators.
Under the new guidance loans that became delinquent while in Kobin related forbearance, well incur a lower capital charged in loans delinquent not in coburn related forbearance. Additionally, kobin related forbearance delinquencies that self care through a payment deferral or repayment plan well not incur an increase capital.
Charge.
Without FHC phase updated capital treatment guidance for Kobin related forbearance.
Our total capital requirement would have been $7 billion higher before accounting for CRT.
In May the FHLB released a new propose regulatory capital framework for the geographies that is expected to require us to hold significantly more capital than the world proposed in June of 2018.
While the re propose roll maintains a mortgage risk sensitive framework. It includes additional requirements that increase the minimum leverage based capital.
Require capital buffers that can be drawn down in periods of financial stress.
Pose a minimum percentages or floors on risk weight exposures and on retain portions of credit risk transfer transaction.
Transactions and provides less capital relief for credit risk transfer activities and under the 2018 proposal.
We believe the new proposed capital role could have significant consequences for a business model capital planning an ability to attract private investment if implemented as currently proposed we plan to send that a public comment letter with our recommendations for the final rule.
Finally, as you are aware, we announced last month that we retained Morgan Stanley as or underwriting financial adviser to assist in development of a recapitalization plan that is critical a critical input into our FHLB directed transition out of conservatorship.
The Morgan Stanley team, along with our legal counsel Sullivan and Cromwell has been integrated into our process. We plan to continue to work closely with FH effect to develop and implement a responsible and viable approach that enables us to exit conservatorship.
With that he went I will take your questions.
Thanks, a lot.
We will now open the call for questions that pertain only to the earnings statements. Just released there will be no cumin a on any other topics. Thank you.
If you are a reporter and would like to ask a question they signal by pressing star one on your telephone keypad.
If you weren't using a speaker phone. Please make sure your mute function is turned off to a larger signal to reach or equipment.
All lines will be muted unless you were asking a question.
Again, it is star one if he would like to ask a question.
And we will take our first question from Bradley's Finkelstein with National mortgage news.
Good morning, Thank you and swaps.
My question is about <unk> so.
Oh, Hi, these impacts on and they earnings going forward I remember.
Several years back when People's person produce.
There you may ask you have to make it wrong treasury.
Good to be woman faces a standard.
In all go Forbearances that's <unk>.
How is that going to I would see because I'm not saying that he's earnings.
Hi, Brad Thanks for your question.
What's interesting about Cecil is that instead of a two year for lock, which was what our former accounting policy.
Consider it's a lifetime luck so in the case Oh.
Overhead related forbearance in particular, because we have an expectation that many of the borrowers taking forbearance today will eventually be able to repay the impact to us is smaller where see solve the communist increases the potential losses associated.
With a downturn as when we don't have visibility into the ability or the timing and which a borrower could repay so in this case as I mentioned Cecil it's beneficial because of the lifetime look through.
So you're not going I was hoping that any additional provisions.
As a result, I can't [laughter], well that additional provisions will be really be driven by the path of the pandemic and whether or not it affects our expectations of greater or lesser forbearance or greater or worse outcomes for the borrowers or for example, if there is a.
Significant decline at home prices, so based on our best expectations.
The data we have today, we believe we are propylene provision, but we will obviously continue to evaluate the data as it comes in.
Thank you.
And we'll take our next question Dennis.
Inside mortgage finance.
I think the table.
That's true about Oh, I'm kind of them a minor details.
And I missed part of the call because I was disconnected. So yes, it was I'm sorry.
So loans or what kind of percentage of loans and forbearance.
Did you did you buy.
And kind of the income.
From the extra fees.
Those loans.
Hi Tech, but perhaps.
So you don't mind me clarifying do you mean, no loans that were.
In forbearance really ever guy or them.
Yeah those.
I would love to begin with.
Yes, so the number of loans, we acquired that were already in forbearance. When we acquired them is it's very small I don't have that number with me about versus the size of our buckets. It's it's quite small the number of loans in forbearance in aggregate.
Thus far well that was that initiated forbearances greater than a million, it's about 1.1 million, but less than a million remain at forbearance today.
Yes, okay. Thanks.
Thank you.
And I see no further questions in the queue I will now turn it back over to Fannie Mae Chief Executive Officer, Our Freedom. Please go ahead Sir.
Okay. Thanks, a lot everybody to your part in this morning, and we look forward to Oh Gosh, you again about quarter results in the fall excellent.
Oh.
Ladies and gentlemen, this concludes today's call and we thank you for your participation you may now.
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