Q3 2020 Federal National Mortgage Association Earnings Call
In funding to the mortgage market through one of the most severe and southern economic shocks in a century.
Even as unemployment spiked nearly 15% nationally.
Uninsured mortgages continued to flow the credit worthy borrowers.
We are helping millions of homeowners refinance and save money on their mortgages and the time of need.
We continue to fund a robust market for home purchase loans.
In the first nine months of the year.
Our single family acquisition volume was more than 900 billion.
This puts 2020 on track to be one of the largest volume years in our history.
More than 500 billion of this volume came through a whole loan conduit, which is a vital tool for small and medium sized lenders.
We placed a premium on speed and agility we.
We were able to quickly adapt to servicing tools, we have developed over the past decade.
To meet the needs of the current crisis.
The investments we've made in our technology and changes in how we develop and deploy technology solutions really paid off with dramatic increases in E signing and Dean Odorization as examples.
Together these investments and changes allowed us to respond to coated with commercial speed and agility and yet.
Well the progress made.
Enormous challenges remain ahead of us.
I don't know that we will return to the pre pandemic state of affairs, not Fannie Mae nor the broader housing market that we serve.
And in an important sense I don't think we should be looking for a return to normal because if we did a generational opportunity would be lost.
We can no longer put up action to address the challenges such as the creation of the housing supply our country, so desperately needs out.
Housing is resilient sustainable and most importantly, affordable then.
The new normal for our business will also mean tackling the legacy of racism and housing and the growing list of floods and fires in many parts of our country.
Intimate cannot solve these challenges along but we have a meaningful role to play and we want to fulfill that goal to our utmost ability.
The housing finance system of the future will need to be more dynamic more innovative and more digitized above all it must be more responsive to the needs of families of all incomes and backgrounds.
And on all those towns conservatorship limits, our ability to innovate and contribute to that better system.
While the status quo makes suit some it is unsustainable and the status quo is not what our housing system will need in the years to come.
Housing needs G.S., he said a reliable in all markets, well regulated well capitalized and innovators.
This is why we believe a thoughtful and responsible into conservatorship a regulator stated goal is vitally important.
It's why we look forward to EPS chip, a finalizing the GSV capital rule and working with that budget day to implement a new capital standards we.
We believe our affordable housing mission and the mortgage market overall would be best served by a recapitalized Fannie Mae if.
Fannie Mae that is out of conservatorship, well regulated well capitalized and able to deliver dynamic and innovative solutions to market will demand.
We believe this result will put us in the best possible position to fulfill our chartered role in housing finance in both good times and in that.
We look forward to working closely with EPS that day, and all of our stakeholders to achieve that EPS.
With that I'll turn it over to Celeste, who will take us through the quarters numbers than men. So less than I will be happy to answer any questions. You had before wrapping up today's call Celeste take it away.
Thanks, you and good morning.
Third quarter was one of contract.
The country continues to grapple with the ongoing social and economic impact of the pandemic get the housing market has remained remarkably strong.
Record low interest rates produce some of the highest refinance volumes, we've ever seen well housing prices continue to rise due to an overall supply and demand in balance as.
As well as the ongoing impact of low rate.
Those trends drove our strong results this quarter. However, we remain cautious.
Well the economy continues to recover there remains much uncertainty.
Coburn infection levels rising again, both on the U.S. and overseas.
Our segments of the country are struggling economically and there is little clarity on whether we will see additional stimulus measures.
Nevertheless, we remain focused on our role and mission as we navigate these extraordinary times.
First we are committed to managing risk and ensuring that we maintain the quality of our guarantee Buck through this period of record acquisition volumes.
Second we remain a source of significant liquidity to the market.
Has particularly been the case for our whole loan conduit, which primarily supports small to medium sized lenders.
Conduit volumes increased approximately 150% from the third quarter of 2019 to average $3.4 billion per day this quarter.
Third and critically important we are working tirelessly what the I think to say an or servicers to find solutions for those homeowners in forbearance that won't allow them to stay in their homes whenever possible.
Let me now turn to our results we.
We reported $6.7 billion of net revenues in the third quarter, a 15% increase from the prior quarter.
Comprehensive income was $4.2 billion up 1.7 from the second quarter as the operating environment with strong in our results benefited from the Redesignation and sale of a portfolio of re performing loans.
In the quarter interest rates again declined as the Fannie Mae 30 year rate dipped below 3% well home prices increased by 2.6%.
These trends contributed to strong activity levels, particularly refinance volume, which drove a $760 million increase and not amortization income.
Additionally, as I mentioned, we re designated $5.7 billion of re performing loans from held for investment to held for sale in the quarter.
We sold a first pool of these loans and plan to sell the second call in the fourth quarter.
This sale generated approximately $420 million of investment gains while the redesignation generated approximately $500 million of credit related income since the release of the associated credit allowance.
In total credit related income improved by approximately $450 million from the second quarter, driven by the RPL redesignation as well as improved home prices, partially offset by the impact of continued uncertainty about Kobe and on the credit allowance.
I'll discuss credit in more detail shortly.
Lastly, fair value losses in the third quarter were approximately $700 million lower than the second driven by lower losses on debt held at fair value and higher gains on credit enhancement to revenue.
Now I will turn to our segment results are.
Our single family business earned 3.8 billion and the net and net income in the third quarter up 1.7 from the second driven by higher amortization income higher credit related income lower fair value losses, and higher investment gains.
Single family acquisitions of 391 billion increased 11% from the second quarter.
Well refinance volume remained high in the third quarter purchase volume increased to 32% of total acquisitions from 26% and the second for.
For comparison mortgage acquisitions doubled from the second from the same quarter in 2019.
The credit profile of our acquisitions remain strong as Ltvs have a decrease from 77% to 71% and FICA scores increased by nearly 11 points to 762 from a year earlier.
The single family seriously delinquent serious delinquency rate increased 55 basis points from the second quarter to 320 basis points, largely due to loans and kobin related forbearance.
As a reminder, we do not classified loans as seriously delinquent until they are 90 days past due the us some loans that had previously opted into our forbearance program only recently became Asti Q X.
Excluding loans and Kobin related forbearance, the ASCII cure rate would have been 65 basis points in the quarter up six basis points from the second.
Turning to multifamily net income of 460 million in the third quarter was relatively flat to the second as lower credit related expenses were offset by lower net interest income and a shift from fair value gains to fair value losses well.
Well overall net interest income was down for the quarter driven by lower yield maintenance income core guarantee fee income was up driven by a growing book of business and strong pricing.
Multifamily the allowance declined in the third quarter, so credit losses increased quarter over quarter due to a charge off for a large seniors portfolios that defaulted out of forbearance.
Multifamily acquisitions, a $15 billion decrease from $20 million in the second quarter, we enter the fourth quarter with $33 billion of capacity remaining under the FHLB <unk> hundred billion dollar volume cap.
Well to your family's third quarter serious delinquency rate increased to 112 based basis points up 12 from the second largely due to the impact of coking coal would related forbearance consistent with single family.
Excluding loans in forbearance, the third quarter EPS to cure rate would have been down five basis points from nine in the second.
Let me now provide an update on coated forbearance and related impacts.
Cumulative coded forbearance take up rates at the end of September was 7.3% for single family based on loan count and 1.4% for multifamily based on new Beep U P. B.
Forbearance trends remain better than we had initially forecast at the onset of the pandemic.
For single family of the $1.2 million million loans that have entered forbearance. This year, 44% have already exited leaving approximately 700000 loans or 4.1% of the single family guarantee book based on low count loan count and active forbearance and I'm not alone is that remaining.
Forbearance, 20% are still current and paying their monthly principal and interest.
CRE multifamily approximately half of the 5 billion of U P. B that has entered forbearance today <unk> 0.6 of the U.P.B. into multifamily Buck has since exited and entered a repayment plan.
We now forecast that the ultimate coded forbearance take up rate will be approximately 9% for single family and 5% for multifamily with loans continuing to enter forbearance throughout 2021.
Let me briefly recap the impact of forbearance and our financial results. As we have previously noted we continue to accrue interest on delinquent loans impacted by coated which contributed over $750 million of net interest income in the third quarter and 2.2 billion year to date.
That recorded interest was partially offset by an increase in our credit valuation allowance of approximately $400 million in the third quarter and nearly 600 million for the year.
This allowance is in addition to the amounts we reserve for Covanta as part of our regular loan loss allowance.
Additionally, what loans are in forbearance, we advance for dawn foreign born principal and interest payments to Servicers. Those advances have totaled under half a billion dollar since the start of the pandemic also if loans enter a flex modification or nonperforming for a long or prolonged period.
We are required to purchase them out of trust. That's far these purchases have been limited, but we anticipate it could be significant and 2021.
We have issued debt in anticipation of funding expected P and I advances and loan buyouts. In addition to maintaining our elevated support of the whole loan conduit.
As a result of this issuance issuance our debt outstanding was $290 billion at the end of the third quarter just under the 300 billion dollar P.S.P.A. mandated cap and compared to $214 billion a year ago.
As I mentioned before credit related income was approximately $430 million in the third quarter, primarily due to the roughly 500 million dollar impact of releasing reserves. The RPL portfolio that we re designated in the quarter.
Excluding that activity credit related income was relatively flat for the quarter as improvements in the housing market were offset by continued economic uncertainty uncertainty.
Turning to net working capital comprehensive income of 4.2 billion increased our net worth to $20.7 billion at the end of the third quarter.
Also in the quarter, our conservatorship capital requirement increased 3.3 billion to 90.8 billion from the second quarter, driven mainly by historically strong acquisition volumes or reduction in C or a t. benefit and the impact of loans in forbearance, which offset a reduction in capital from the impact of currency.
Renewed home price appreciation home price appreciation and an improved acquisition profile.
We anticipate the Finalization of that feature phase proposed capital rule late this year or early next we estimate that our total regulatory capital requirements under the proposed rule as written would be approximately hundred and 60 billion, which includes over 120 million of common equity tier one.
Capital <unk>.
The increase in capital requirements as compared to Conservatorship capital reflects.
Our new buffer requirements, the risk weight floor and reduce capital relief from CRT.
Now I'd like to turn briefly to our outlook both for the economy and housing and how that may affect Fannie mae's future financial performance.
We currently project full year 2020, GDP to declined by 2.6% this.
This forecast assumes that there will not be an additional round of stimulus this year, which recently, let us to downgrade our Q4 GDP growth estimate.
However, our hautelook outlook for home prices has improved since the second quarter. We now forecast full year 2020 home price growth of 7% all of which has already been realized through the third quarter.
We forecast home price growth of 1.7% and 2021.
We expect interest rates to remain extremely low low through 2021.
Because of these trends, we have meaningfully revised upward our market originations forecast for 2020 to 4.1 trillion, surpassing the prior record from 2003 when market originations were 3.7 trillion we.
We expect 2021 originations to decrease to 2.6 trillion driven by a decrease in refinance activity.
On the multifamily side, we have seen purchase activity recovers since the start of the pandemic well refinance volumes have remained strong.
So our outlook for multifamily has improved and we expect to see strong volumes through the rest of the year.
Looking forward.
We believe refinance activity as I mentioned will remain high through the rest of the year and into next week.
We estimate that approximately 66% of outstanding outstanding single family first lien loan balances have rates at least half a percentage point point above current levels and last would economically benefit by refinancing.
As a result, we expect high levels of amortization income to continue into the fourth quarter and likely through the first half of 2021.
As I also mentioned previously we anticipate having to purchase a significant number of cold it affected loans out of trust and 2021. This will further boost amortization income since we recognize net unamortized premiums on the related MBS that as much as security pays down.
Well, we are likely to benefit from robust activity levels. Our credit reserves may continue to be affected by these uncertain outlook and the risk of a kobin resurgence growth.
The economic impact of the pandemic and a lack of clarity around additional government stimulus measures remain significant risks as.
As a final note we plan to implement hedge accounting in the first quarter of 2021, which we expect will reduce earnings volatility related to interest rate exposure, though our exposure to spread movements will remain.
A few noted in his remarks, Fannie Mae serves multiple roles, we ensure the safety and soundness of the housing finance system.
We provide needed liquidity in good times and bad and we have a unique focus on our mission to support homeowners, particularly in times of crisis.
As we continue to navigate the extraordinary cross currents of the pandemic with record levels of mortgage <unk> acquisitions, but also a significant number of homeowners in forbearance, we will remain focused on fulfilling these important roles.
And with that he and I will take your questions.
Thank you.
I'll now open the call for questions that pertain only to that any statements just released there will be no cure. Many many other topics. Thank you.
If you are important and would like to ask a question. Please press star and then one on your telephone if you are using a speakerphone. Please make sure. Your mute function is turned off to a larger signal to reach our equipment.
<unk> will be needed unless you are asking the question.
Pause for just a moment.
As a reminder that is star one if you would like a question.
Pertaining to any statements.
And we'll take our first question from bond issue now with areas.
Hi, this is up like that and that's why you see the right and I wanted to.
Two things one was whether there were any particular I know it's been in the works for a while even though you have you can you can go into place in the first quarter and then I just want a little more clarity on the context between or the 9% for Barry Barry.
Outlook that you have it I wasn't sure I understand the full context that seems high human muscle Bury Street.
And more recently.
Hi, Hi, Bonnie nice to hear from you as always.
And your first question on hedge accounting, we do plan to implement it in the first quarter based on where we are today course, it's it's quite a big undertaking a mall assesses the time UBS.
But but at this point, we do expect to implement that in January and you know we believe it is important tool.
Both in Conservatorship, then out of conservatorship to reduce the earnings volatility associated with interest rate movements.
As it relates to forbearance, the 9% number that I quoted for single family is a cumulative number so our cumulative forbearance rates to date are eight or sorry, a little over.
A little over 7%, 7.3%. So this would be any additional mortgages that went into forbearance. So our actual active rate today is 4.1%, but this would assume 1.7% additional on mortgages go into forbearance between now basically Indiana.
2021, which.
Given the ongoing pandemic and you know the <unk> looks like things are shutting down potentially again.
It is we believe likely or possible.
Okay, no it's like the cumulative rate for the full year is that correct.
[noise] that that's correct about not flow through the year, but through next year, that's correct that's correct.
Okay. So yeah 21.
Yes, so the academic world correct.
Okay. Yeah. So active today is 4.1.
In single family cumulative and single family, a 7.3 and cumulative expected is just under 9%.
Okay got it thank you.
And next we'll hear from Denis Holler with inside mortgage connect please go ahead.
Thanks for taking my call or questions about the.
Updated accounting policy for non accrual loans.
The the uploads is the Holy Grail.
A little bit about that.
On Saturday.
Sales for southern.
$763 million in additional income that's going a little bit more vulnerable to bill.
Sure I'd be glad to so the regulators the prudential regulator as well as the <unk> and Fad would be made it a I guess, what you would call an exception to the norm all non accrual policies given the pandemic so typically.
After a couple of months, we would stop recognizing income our SAP recognizing p. an eye on mortgages that have have that are.
<unk> have stopped paying but given the expectation that there's a likelihood of people beginning to repay after the pandemic is down or when they get their jobs again.
There was an exception made for a low covert related forbearance. We are also holding an allowance against that income that we're recognizing there was about 400 million this quarter 200 million last quarter. So while most of the we expect most of the bar.
Growers, who are unable to pay today to be able to pay sometime in the future that will be something that won't be able to do so.
So they will have the incentives on something.
Sorry go ahead.
And affected could offset that 73 with.
That's been set aside for <unk> as well.
That's correct. So we so while we're recognizing the income there is that offset and any allowance.
Okay.
Got it.
And up next we'll take a question from <unk> with <unk>. Please go ahead.
Oh, yes, good morning.
I'm wondering if you could please expand on the gains on credit enhancement derivatives on.
On the Connecticut Avenue Securities just how does that work.
So and that that the those particular securities are marked at fair value. So depending on the value perceived it going moving up or down you would have gains or losses.
What would be sort of a a movement that would expect greater losses on those securities would be reflected as a fit for the securities holder would be reflected as a gain for us on our income statement.
Okay. Thank you and and is it a specified or quantified and further in the press release.
We haven't.
Broken out the specific amount for those securities.
We typically don't there's a number of different different securities and a fair value loss line.
Okay. So that's something that you would do or not at this time no. I mean, we did we took whatever we have so many different securities in that line you know lead to break out each one the movements, you know up and down with wood.
Be exhaustive then in highly unusual.
Sometimes the minimum wage do you what's the cumulative number.
I I don't have that number with me.
Okay. Thank.
Thank you.
Yeah.
And our next question comes from Andrew <unk> with the Wall Street Journal. Please go ahead.
All right. Thanks for taking the call and taking the question for doing the call I guess I'm, just trying to understand a little bit better.
Did you mean I know, we saw higher amortization income.
Oh, you staying on claim Bush.
Yes, sure so when we buy Oh, no a guarantee alone.
See no further questions in queue I will turn it back over to Fannie Mae Chief Executive Officer, you are freighter. Please go ahead Sir.
Well. Thank you everyone for joining us we appreciate your questions and we look forward to things together with you again and the new year. Thanks a lot.
And this.
Glutes today's call. We thank you for your participation and you may now disconnect.
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