Q4 2020 Federal National Mortgage Association Earnings Call
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Good day and welcome him to the Fannie Mae fourth quarter 2020 results Conference call. Today's conference is being recorded I would now like to turn it over to your host Pete <unk>, Fannie Mae's director of public relations.
Thank you Hello, and thank you all for joining today's media call to discuss Fannie Mae fourth quarter and full year 2000, Twenty's credential results.
Please note. This call may include forward looking statements, including statements related to the company's business and financial results its future loss mitigation activities on their outcomes and the impact of COVID-19 pandemic, we shouldn't amendments to the company's preferred stock purchase agreement with the Treasury.
Economic and housing market conditions, the company's capital requirements on the company's business plans and strategies future guidance. They turned out to be very different from these statements and risk factors and forward looking statements sections of the company's 2020 for 10-K filed today describe factors that may lead to different results as a reminder, on this call.
It is being recorded by Fannie Mae.
<unk> may be posted on the company's website, we ask that you do not record this call for public broadcast and that you do not publish any full transcript I'd now like to turn the call over to Fannie Mae Chief Executive Officer, She walked frater and Chief Financial Officer Celeste playground.
Welcome and good morning. Thank.
Thank you for joining us to discuss our fourth quarter and year end results for 2020.
Before anything adopters for the last I guess, that's that results in depth.
Oh for a few thoughts on the extraordinary year behind us on the road ahead.
2021.
What are your 'twenty was truly an historic mission Goldman for Fannie Mae.
As you know we were charging them for 80 years.
What's your liquid secondary market for housing.
Both good times and bad for them.
Lenders folks working from home.
Yeah.
Our mission is to help ensure that housing for answers affordable and available I believe that we'll fulfill that mission very well through most of our existence.
Much has been written about the causes for the last financial crisis from 2008.
For the roles of the various factors, including the Jefferies.
There's a little debate about the positive role we are playing in today's Covid crisis.
That's because today every day.
Very different and for a more resilient.
Yesterday.
And in 2020, the greatest labor market disruptions since the Great Depression, we provided historic amounts of liquidity for the mortgage market. When you provided for parents to more than 1 million homeowners.
In their homes.
In partnership with our board of directors and our Conservative for FHFA, we expect the past dozen years transforming Saturday night here for emission low like this.
Our immediate and most.
We can focus this past year was hoping Americas homeowners and renters, who are struggling with the economic impact for the global pandemic.
Working closely with FHFA, we lost critical solutions.
Got it.
We work hand in glove with our lenders and Servicers to ensure that we are helping our borrowers know understand and take advantage of their options.
These efforts resulted in more than one 3 million.
Single family borrowers getting needed relief to forbearance plans for <unk>.
We took steps with our multifamily lenders to forget evictions for properties at least on ads.
We launched on nationwide here to help campaign can be struggling homeowners and renters to make sure. They are aware of the resources available to day standard bulbs.
December here to help us reach more than 150 million consumers on approximately 60% of these consumers will flow.
We're already living with popular.
Operations.
Without partnering standard disaster response network.
We connect homeowners on records with federal and local services. We typically use this network to help consumers respond to natural disasters.
Good day, we've activated these capabilities to help consumers deal with a disaster for all the different types.
Tens of thousands of calls from borrowers on revenues.
Indeed.
You said that thousands of all water from falling behind on their mortgage payments the work's taking advantage of forbearance.
You start educational outreach records to help them understand their options.
The same with low income homeowners potentially reduce debt repayments.
Financing that had not yet applied for it.
Our ability to help millions of homeowners and renters hit by the pandemic is not accidental.
It was the result for a long partnership with average.
Hey.
For the company and to incorporate lessons learned from working with homeowners in distress.
And then it also because I did on historic challenge for the broader market.
To provide a stable source of liquidity through all market conditions.
Early stages of the pandemic when the financial markets were volatile.
All the sources of mortgage for Mats quickly stepped back from the market.
We do bond.
It's Ted.
For to continue to offer mortgage financing.
And that evolved weighted record year mortgage activity, resulting in billions of dollars of savings.
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Altogether, we provided more than one four trillion mortgage liquidity from 'twenty to 'twenty.
It was record low interest rates go up a record demand for mortgage financing.
Refinancing, one and a half million home purchases from 'twenty to 'twenty up more than 20% from 2019.
We also refinanced the $3 4 million loans up more than 2% from last year, helping homeowners take advantage of historically low interest rates.
And we finished at 792000 units of rental housing for the 90% of them affordable to families, earning at or below 120%.
The median income.
For the 'twenty was also to your growth countries deep ratio from social and equity standard before.
In equities that have long affected on those basic need.
Guidance.
We are not near observers here or 1000, it gives us the ability and responsibility.
A positive change.
We're trying to do so.
It starts from <unk>.
We are deeply committed to diversity and inclusion.
We do this not only because it's right.
It helps us better see and serve our diverse communities.
You are also right.
Working with partners of crops.
Dan its opportunity and tackle racial justice.
His commitment to go to the heart of our charter.
Who we are.
The GAAP and minority homeownership is long standing and economic downturn, such as 2008 for.
2020.
Only make it harder to overcome.
Well this is a complex challenge that day, they cannot address on its own.
Our intention to do all weekend.
Work with our partners in the housing industry.
Net.
All in all 2020 cash with us unprecedented ways.
Proud of how our people came through helping us serve the market when the market needed us most.
And I give a special thanks for the support of the FHFA and our board of directors throughout this challenging year.
Finally.
We began in 2021 with treasuries and damage to the preferred stock purchase agreement.
But for them they believe that responsible exit from conservatorship.
Recapitalization of Saturday day.
He is the best way to support our mission to serve America's housing needs for future generations.
Protecting the taxpayer and creating a substantial their loss absorbing capital.
This agreement continues us down that path.
It allows us to continue to grow our capital through retained earnings.
It provides for the possibility of raising private capital.
And it creates a potential paths can responsibly extra conservatorship, when we achieve certain levels of capitalization, while also providing optionality for policymakers on the cash.
On a forward.
For our part we recognize that safety and soundness, including a strong capital base is critical to our future independent mission driven commercial enterprise.
Well, we put on mission first.
Could not fulfill that mission through market cycles and.
Unless we are safe and sound from prop.
For the capitalized.
And we cannot be properly capitalized unless we already have in basketball.
On the travel risk capital from the private sector.
We continue to believe that a Fannie Mae that has reformed well regulated.
Capitalized and out of conservatorship.
Best serve the needs and interests of our nation's housing markets for that housing mission.
It will help us ensure stability on a steady supply of liquidity through all market cycles, and just as importantly, it will help us deliver more dynamic innovative solutions to it.
Span housing opportunity for dress racial disparities and help manage and mitigate regardless from climate change.
To wrap up my remarks.
2020 demonstrated the essential role we play for homeowners homebuyers.
Home buyers and renters for housing finance system on the economy.
Even though on to the most challenging conditions.
As we go into 2021.
The nation is not yet out of the woods.
So on a mission that is as critical as ever.
We continue to focus on ensuring stability and liquidity on the mortgage market.
And as always we continue to focus on safety and soundness, including building our capital base that is sustainable and festival metal price.
With that I'll turn it over to Celeste, who will take us through the numbers on that so that's and I will be happy to answer any questions you have before wrapping up todays call less take it away.
Thank you Hugh.
Everyone.
As you discuss 2020 was a year of unprecedented challenge for Fannie Mae and the world.
The pandemic and our response demonstrated our critical role supporting housing finance across all markets and economic condition.
Even if it's private mortgage liquidity was true when economic uncertainty of the pandemic took hold.
We remain a constant and stable source of liquidity.
This is particularly evident in our whole loan conduit, which is vital for smaller lenders, who are often key sources of housing finance underserved rural and urban areas.
Conduit volumes more than doubled to nearly 715 billion in 2020 and more broadly we provided record liquidity to the single family and multifamily markets.
Perhaps most critically a decade plus of work to strengthen our risk management was evident in 2020.
Financial results in the health and resiliency of America's housing system net.
Based on the pandemic stands in Stark contrast to 2008 when housing was a key driver on the financial crisis.
I kinda on churn I think Japan Treasury agreed to amend the senior preferred stock purchase agreement for <unk>.
S P a.
So net net has many implications for us critically.
The amendment suspends the net worth sweep it allows us to build our capital until we achieve adequate capitalization under the new enterprise capital framework.
This is essential.
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Building substantial GNC equity and capital remains a key on finished aspect of our transformation under conservatorship.
Additionally, the amendment, formerly creates a foundation for exiting conservatorship.
We believe that recapitalizing and exiting conservatorship is an important goal as it will enhance our safety and soundness protect the American taxpayer and we believe allow us to be more dynamic and better positioned to meet our mission and the constantly evolving needs of the housing system.
The amendment also introduced some new limits on acquisitions on mortgages with multiple risk layers and the financing of second homes and industrial properties and in both impose additional constraints on our multifamily acquisition volume.
We are assessing the operational and financial impact of these low on that but we anticipate fully adopting to them as we have too many other changes over the years.
The Amendment also include the cycle on that on the use of the whole on conduit by originators.
While we are still evaluating the impact of this one that we believe that most of our small lenders for whom the conduit provides funding will be unaffected by the new cap.
This is particularly important small lenders are critical to our mission since they support the availability of mortgage for ONEOK and underserved areas.
And while the capital we need to exit a significant changes we make in response to the P. S. P. A amendment will likely decrease our capital needs over time zone.
It will reduce the amount of leverage space and risk based capital required to support our business.
Let me turn to our results.
Extraordinarily low interest rates and the robust housing market continued into the fourth quarter.
Acquisition volumes were at record levels for the quarter.
Leading to 9% growth in our guarantee book.
In 2020 refill.
Refinancing activity was significant accounting for 66% on acquisitions in 2020 compared to 42% in 2019.
Home prices are strong as well.
Brian estimated 10.5% in 2020, including 3% on the fourth quarter when prices are typically flat or down.
We achieved strong financial results against the backdrop for the fourth quarter net revenues of 7.2 billion grew 7% from the third quarter call.
Non core has an income of $4 6 billion increased by approximately 8% quarter over quarter, reflecting the higher net revenues and $1 4 billion of credit related income that was partially offset by increases in fair value losses of nearly 900 million on lower investment gains.
For net revenues increased 16% for $25 3 billion.
Acquisition volume drove higher remit, a guarantee fee income and accelerated net amortization income. However for your comprehensive income of $11 8 billion declined 16% largely due to a shift from $3 5 billion of credit related income in 2019 to nearly nine.
$100 million of credit related expense in 2020, as a result of the pandemic.
A number of items affected our credit expense in 2020.
Most significant was the $2 6 billion credit allowance booked in the first quarter predominantly driven by the expected impact of the pandemic.
Subsequently credit results improved.
Strong home price growth and low interest rates. The credit results also benefited from fewer loans entering forbearance versus our initial expectations, along with better outcomes for loans exiting for bags and we expected at the outset at a roughly $700 million benefit from the re designation on a re performing loans.
Prior to sale from the portfolio.
As you know selling nonperforming and re performing loans has been an important part of our credit loss mitigation strategy in recent years.
Now, let me turn to our segment results starting with single family.
In the fourth quarter single family net income of $3 9 billion increased four 6% from the third quarter as higher credit related income and net revenues were partially offset by higher fair value losses, and lower investment gains as.
As already discussed record volumes continued in the fourth quarter on the year in 2020 single family acquisitions more than doubled to nearly $1 four trillion and the guarantee book grew by over 8%.
Acquisition growth, particularly from refinancing drove an 18% increase in single family revenue to $21 $9 billion from 2020. However.
However single family that income declined 16, 5% largely because of the shift from credit income in 2019 to credit expense in 2020 as discussed previously while.
While lower investment gains and higher fee on that fair value losses also contributed.
The credit quality of single family for acquisitions remains strong.
For the high share of refinance volumes, which typically have better credit profile.
In 2020 acquisition Ltvs improved five percentage points 500 basis points for 71% and FICO scores increased by 11 points to 760 <unk>.
Single family serious delinquency rate of 2.87% decreased by 33 basis points from the third quarter, reflecting loans exiting for balance and becoming current.
Excluding loans and Covid related for balance he asking Q rate would have been 66 basis points in the fourth quarter in line with the third.
Turning to multifamily fourth quarter net revenue is just under $1 billion were 19% higher than in the third well net income grew 36% for over $600 million, reflecting higher revenue and a shift from credit expense in the third quarter for credit income.
Multifamily acquisitions for the year were a record $76 billion driving nearly 14% guarantee book growth in 2020.
Total five quarter acquisition volume through year on 2020 on there I think for Phase 100 billion dollar cash for that period was 94 billion and we met the cap 37, 5% minimum requirement for mission driven housing.
I forget Bay has set for fiscal year 'twenty 'twenty, one acquisition cap to 70 billion and increase the mission driven housing requirement for 50%.
The P. S. P. I am not net established an additional 80 billion dollar limit on our multifamily mortgage acquisitions during any 52 week period.
For the 70 billion multifamily volume cap remains in effect for 2021, the new 80 billion dollar P. S. P. A limit operates as an independent limit on our future multifamily acquisition.
Given very strong demand and our supply being constrained by the volume cap imposed by the FHFA.
We have had to take certain Akron actions to slow our acquisition rate, including raising pricing.
Multifamily is fourth quarter serious delinquency rate fell 14 basis points to 98 basis points from the third as loans exited for Darren and in most cases started to re perform.
Excluding loans that have received it for bad the fourth quarter as the cure rate would have been three basis points.
Now, let me give you an update on COVID-19 related for that.
Our take up rate expectations remain largely unchanged from the third quarter with forecasted lifetime COVID-19 related for balance of eight and a half personnel for single family and 5% for multifamily.
And single family, approximately one 3 million loans or seven seven percentage with single family Guaranty book based on low loan count on.
I've answered for Darren since the start of the pandemic.
And in 2020, 60% of these loans have already exited almost predominantly positive outcome.
With approximately 20% liquidating because borrowers refinanced or sold their home.
Approximately 500000 loans or 3% of the single family Guaranty book based on loan count.
Remains on active forbearance at year end on.
These loans, 12% for cards.
For multifamily.
For 60% of a $5 3 billion of U P. D that has entered a forbearance to date has since successfully exited and neither reinstated liquidated or entered a repayment plan approximately 40 basis points of multifamily P. D remain in forbearance at the end of 2020.
As we have previously noted we continue to accrue interest on most COVID-19 affected delinquent loans.
This interest amounted to $2 8 billion for 2020 and was partially offset by a roughly $200 million credit provision.
Additionally, we advanced $1.2 billion of principal and interest for Fannie Mae trucks from 2020 for past due loans in forbearance to ensure timely payments on behalf of investors.
We are optimistic that a significant portion of allowance in Covid forbearance.
Resolve successfully as to date, most lungs exiting forbearance for payment deferrals or modifications have been able to reach to recur for them or repay.
Nonetheless, there remains some risk there's no certainty around how the pandemic on a communist economies may evolve in 2021.
For example average if they recently announced some loans may be eligible to redeem on forbearance for up to 15 months.
The extension will provide borrowers affected by the pandemic more time to get their finances back on track and we are hopeful that this will result in long successfully resolving after for bad. However, there is a risk that loans remaining on forbearance for a longer period of time may decrease the likelihood of a successful outcome.
Is it single family loan does not resolve and either remains nonperforming for a period for.
A long period or enters a flex modification from here.
We're required to purchases out of trucks.
These purchases were $5 $4 billion from 2020, we anticipate they could grow significantly in 2021.
I think I'm at year end 108 billion on single family and P. D was in forbearance, including $81 billion that was not was 90 plus day delinquent.
We currently estimate that approximately 30% of loans in forbearance may eventually need to be repurchased.
While our credit allowance already reflects expected life of loan losses.
New purchases will increase the size of our retained portfolio, we will need to manage the impact of that on our interest rate risk capital and low teen portfolio cap.
Well I think today has directed us to pause our sales of nonperforming and re performing loans through February 28, as they evaluate their requirements that will apply for future land sales overtime. We may seek to sell portfolios have been belongs to mitigate their impact on our risk and balance sheet.
Turning to capital I.
Our free chip that I recently issued its final capital low compared with the Conservatorship capital measures established in 2018. The final rule has higher buffer requirements counter cyclical requirements risk weight floors on reduced relief from CRT.
All of this will result in a material increase in our capital requirements.
While our net worth at year end was $25 $3 billion, yes to make it total capital requirement under the new rule would have been approximately $185 billion income.
<unk> hundred 35 billion in common equity tier one for CET one capital.
As I noted before the amendment P. S. P. A offers a path for anything to Joe readership. Once our C. E. T. One which is 3% of adjusted total assets, which we estimate would have required CET one on $124 billion at year end.
Yeah, Matt on that allows us to continue to retain capital and promote permits are raising external capital in the future if certain conditions on that.
We are evaluating how to best meet low capital requirements in a prudent manner.
And a final note on capital you on.
Recall that we paused, our CRT program due to market conditions and to evaluate its costs and benefits.
Although she Archie provides significantly less relief under the final capital rules.
Named an important tool that can help us manage capital and risk and we continue to assess the scale and structure of any potential CRT transactions, we may issue in the future.
So let me.
Conclude with some comments on outlook, we expect the economy to rebound in 'twenty 'twenty, one and forecast, 6% annual growth in G. G D P.
We believe economic growth will accelerate significantly starting in the spring assuming vaccination efforts continue.
Additional stimulus passed an additional stimulus passes, prompting a recovery in consumer spending.
We also expect strong economic growth to continue to support housing price growth, which we currently forecast it for 5% on 2021.
We do expect home price growth to flow after 2021.
While we do not anticipate rate actions by the fed this year. There is a chance for mortgage rates to begin to increase if economic growth is as robust as we anticipate.
We expect mortgage originations to remain strong at three nine trillion in 2021, but down from the record for for Trillium last year.
Such activity would fuel continued growth on our guarantee book and then remitted guaranty fee income.
While we expect amortization of income to remain high in 2021, we expect it to decline from 2020 as refinance activity will likely begin to flow in the second half of this year.
In terms of credit the continuation of a strong housing market and unexpected economic recovery in 2021 would be positive factors.
However, much uncertainty remains a new COVID-19 variance appear and it is difficult to forecast for the success of the vaccine rollout and the effectiveness of physical intervention and addressing economic strange relating to the pandemic.
The outlook for credit in 'twenty and 'twenty, one we will continue to depend largely on the pandemic impact on the economy economy and housing.
I also want to note that we just adopted hedge accounting, which will reduce reported earnings volatility related to interest rate exposure. Although we will continue to have exposure to spreads.
He will discuss the impact of hedge accounting in future quarters, well begin to affect year over year earnings comparisons in the first quarter.
Let me conclude by noting the obvious 2020 with a unique and challenging year.
The economic impact of the pandemic underscore the importance of safety and stability in the housing market.
Decade of hard work by the GSE and FHFA may the resiliency of America's housing market today possible.
We understand our role in managing risk and housing finance to it.
Critical government housing policy like Covid relief can be a constantly on set steady source of liquidity to the housing market and to support affordable mortgage financing.
Take this responsibility seriously in 2020 was a real test of our ability your price.
Out of our efforts to help Americans homeowners and renters.
We are also excited about the changes that the new P. S. P. A amendment will allow.
And with that I'll turn things back to you.
Well. Thank you suggested I believe were ready now to take your questions.
Okay.
Thank you we will now open the call for questions that pertain only to the earnings statements. Just released there will be no Q&A on any other topics. Thank you if you're a reporter 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 allow your signal.
To reach our equipment all lines will be muted unless you were asking a question and we'll pause for just a moment to allow everyone an opportunity to signal.
Uh huh.
Yeah.
Once again, if you are a reporter and would like to ask a question. Please press star and then one on your telephone.
Yeah.
Okay.
Alright. Thank you. It appears there are no questions at this time I will now turn the call back over to Fannie Mae Chief Executive Officer.
Our freighter. Please go ahead sir.
Well. Thank you everyone for listening today, and we look forward to look forward to seeing the next time, thanks a lot.
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