Q1 2021 Federal National Mortgage Association Earnings Call
Good day and welcome to the Fannie Mae first quarter of 2021 results Conference call. Today's conference is being recorded at this time I will now turn it over to your host Pete Bake Hill, Fannie Mae Director of external Communications. Please go ahead Sir.
Okay.
Hello, and thank you all for joining today's media call to discuss Fannie Mae's first quarter 2021 financial 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 and the outcomes the impact of COVID-19, the COVID-19 pandemic and recent amendments to the company's preferred stock and economic.
The first stock agreement with Treasury economic and housing market conditions of the company's capital requirements and the company's business plans and strategies future of events may turn out to be very different from the statements. The risk factors and forward looking statements section sections of the company's first quarter 2021 form 10-Q filed today describe factors that may lead to different results.
As a reminder of this call's being recorded by Fannie Mae and the recording may be posted on the company's website.
So you do not record this call for public broadcast and that you do not publish any full transcript.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, Q R Frater, and Chief Financial Officer, So less of Malay Brown.
Thank you Pete and good morning, Thank you for joining us to discuss our 2021 of the first quarter results.
This morning, I will discuss the key themes for Fannie Mae as we've moved through this important year, then I'll hand, it over the Celeste to discuss our results in depth.
I believe time at the end to take your questions.
As I reflect on where we are two things are clear.
First while the spring is brought on the public health front.
The fact remains that the COVID-19 pandemic is still with us.
The effects on families and our economy will be with us for some time the name.
We will present, both challenges and opportunities.
For homeowners and renters.
That's why our priorities in 2020 2021 are.
To continue doing all we can to help borrowers of renters meet those challenges and opportunities and to continue supporting our own employees through these uncertain times.
The second item that is clear is that our first quarter results demonstrate the Fannie Mae has ability to simultaneously deliver on our mission generate reasonable returns and focus on safety and soundness, including rebuilding of our capital base.
As I've said many times these factors may sometimes be intention.
In my view they are not necessarily in conflict.
I believe they complement one another.
Our mission is to provide liquidity and stability and remote access and affordability.
Can fulfill this mission, we need to be safe and sound.
It would be safe and sound, we must be properly capitalized.
And to attract capital over time, we must be investable generate a reasonable return for our shareholders.
In the first quarter, we by and large achieved the spinal balance.
We will continue to pursue that balance going forward.
We are $5 billion of net income in the first quarter.
We provided 422 billion from mortgages that helps people across America refinance the home purchase of home.
The finance rental property.
This last quarter was the second biggest nominal volume quarter in our history.
And we increased our net worth by $5 billion to $30 2 billion.
Represents progress in rebuilding our capital base, which is key to our future.
However, there was one of important caveat.
Given the continued surge in volume our net worth to asset ratio barely moved.
That's the less will explain our capital requirement actually increased this quarter.
In my view this under capitalization is unsustainable and it exposes the taxpayer in the housing finance system to risk.
A lot of close by reiterating a few themes I get on in February.
These themes will remain central to Fannie Mae story this year.
And for some time.
Fannie Mae and our partners throughout housing no. The building the housing system that is more of affordable terror and more resilient as the long term project.
The housing system has gaps Rachel gaps access gaps supply gaps that must be bridged.
We wanna be of part of building that bridge.
The housing market has from much of the past decade sort of many middle and upper middle class of homeowners and apartment owners very very well.
But in many communities the supply of housing from moderate and low income families.
The crisis levels.
That's why we are putting Fannie Mae as Michigan first.
The focus on how we can improve the housing system to better serve borrowers and renters.
That means all borrowers in the renters, including people, who had historically been left behind by a housing system such as black people at other people of color.
The housing and mortgage markets of stood up very well to the shock of the pandemic.
The pandemic has also highlighted the ways.
The housing finance system continues to fail many of our working families.
Serving these families better will require a change from today's status quo.
We cannot just accept things the way they are not us, but the mortgage industry of the homebuilders not the reality.
At the apartment owners not any of the stakeholders in this basket ecosystem.
The form so well economically in the past year.
We welcomed for example, this week's announcement by FHFA of refi now.
New refinance option to make it easier to qualify and lower income borrowers to reduce their housing costs.
This is just one small step and we hope our partners in the industry will embrace the challenge.
The past year have shown that we have the capacity of the tower at the end of tools.
The hope imagine steps like this and make them succeed with the <unk>.
Right partnerships and tools.
We can build a better housing system.
Today, we are serving homeowners and renters with this goal in mind, we are prepared to do more tomorrow.
More of the day after that.
I'll turn it over just the last now who will take us through the numbers so let's take it away.
Thanks, Hugh and good morning, before I speak to our financials I'll take a moment to reflect on the first quarter.
On one hand, we rapidly implemented programs that provided much needed relief to homeowners and renters, who are adversely in some cases severely impacted by the pandemic, allowing them to stay on their homes.
On the other hand, we handled record volumes of mortgage prepayments of new acquisition of borrowers took advantage of low interest rates and a booming housing market.
Just contrasting circumstances of the pandemic for borrowers and renters on there.
Your score our role in supporting America's mortgage markets in good times and bad.
And what often goes on remarked upon is how little disruption there has been the mortgage market despite the stresses and strains.
This reflects the seriousness with which we take our charter responsibilities and the skill and excellence of the people at Fannie Mae, whose hard work and diligence has made it possible for America's homeowners and renters to purchase refinance rent forgot real urgent financial relief during one of the most challenging periods in our lives.
Time.
Let me turn to our financial results. It was another good quarter for Fannie Mae.
The housing market remained robust in the first quarter with an unseasonably strong 3.4 per cent increase in home prices amid continued low interest rates first.
First quarter of mortgage origination.
Mortgage the acquisitions of 422 billion the second highest level in our history was down 7% from the record fourth quarter the GAAP.
Guaranty book grew 2.4 percentage three eight trillion.
Well purchase volumes declined due to seasonal reasons refinancing activity remained near fourth quarter's record levels.
The refinancing was 75% of first quarter of single family acquisition.
Per the 71% in the fourth quarter and 64% of your earlier.
First quarter net revenues of $6 8 billion declined 6% from $7 2 billion in the fourth quarter, largely due to lower amortization income.
However, despite these lower revenues comprehensive income of $5 billion increased approximately 9% from last quarter largely as a result of fair last fair value losses in the fourth quarter shifting to gain this quarter, partially offset by lower credit income.
The shifts from fair value losses to games.
Out of largely from the implementation of hedge accounting in January.
This benefit from has the counting arose because it allows us to better match, the timing of the accounting gains and losses from our derivative hedges with the underlying economics of the loans or funding debt we are hedging.
For hedge accounting, we reported the fair value of the derivative hedges of the derivatives used to hedge interest rate risk and fair value.
<unk> and losses.
Now we net these derivative hedges with the fair value gains or losses of the loans or funding debt their hedging and report them. The net interest income.
Hedge accounting improved first quarter pretax income by approximately $1.2 billion.
How'd, you're counting reduces the earnings volatility related to interest rate movements in any given period. It does not impact the amount of interest rate driven gains or losses, we will ultimately recognize two our earnings over time.
Credit was also a significant driver in the quarter, we had $770 million and credit related income in the first quarter compared to $1 4 billion in the fourth.
Above average home price growth and the doubling of our full year of 2021 home price growth forecast were the primary factors in the reduced credit allowance that was partially offset by the empire impact of higher actual and projected interest rates now.
Now, let me turn to our segment first.
First quarter of single family net income of $4 $4 billion increase approximately 11% quarter over quarter.
Lower credit related income of 5% decline of net revenues from lower amortization income was more than offset by a shift from fair value losses. The games as described previously.
Single families. The average conventional guaranty book grew by two 4% from the fourth quarter, just 3.2 trillion.
First quarter acquisitions declined 25 billion to 400 billion driven largely by the seasonal decrease in purchase acquisition.
However, refinance volume of 301 billion of the first quarter remained unchanged from the force.
You will recall that certain restrictions on our single family acquisitions were included in the January of Amendment to our senior preferred stock purchase agreement.
So far the use of had minimal impact on acquisition, but we continue to work on implementation of the new restriction.
First quarter average charged fees on single family acquisitions net of T. C. C. A grew 4.2 basis points from the fourth quarter to 48 basis points. This increase reflected our implementation of the adverse market refinance of it in December.
The credit quality of single families acquisitions remains strong.
By the high share of refinance volumes, the typically have better credit profiles first quarter of loan to value ratio or LTV ratio on the refinance the acquisitions of 63% was the lowest since 2011.
Total first quarter weighted average acquisition LTV ratio improved by two percentage points from the fourth quarter to 68%.
While the weighted average FICO score decreased by one point to 761.
The single family serious delinquency rate was 2.58% in the first quarter down from 2.87% last quarter due to the ongoing economic recovery and the decline in the number of the Companys single family loans, and COVID-19 related forbearance plans.
Excluding loans and COVID-19 related forbearance, yes, the cure rate would have been 66 basis points of the quarter flat with the fourth.
Turning to multifamily first quarter net revenues of 873 million down 9% from the fourth quarter due to lower net interest income, which drove a 4% net income declines of 599 million on.
You mentioned last quarter that given strong demand, we have taken certain actions, including raising prices to manage our pipeline and roommate remain under the FHFA is the acquisition cap as of.
Result, the average charged guaranty fee on our multifamily book of business increased to 76 basis points.
Multifamily is first quarter of serious delinquency rate fell 32 basis points to 66 basis points from the fourth quarter and from a peak of 125 basis points in July the <unk>.
Prudent reflects lungs exiting forbearance that of performing under repayment plans or were reinstated through either becoming current or through modification.
Excluding loans in forbearance, the first quarter of multifamily ask the cure rate would've been three basis points consistent with last quarter.
Now, let me give you an update on COVID-19 related forbearance.
Yeah, I forgot to say extended the single family COVID-19, forbearance to a maximum of the 18 months.
We are optimistic that a significant number of loans in COVID-19 forbearance will be resolved successfully there remains some risk.
The single family of approximately 1.3 million loans or seven 9% of the guarantee book based on loan count kind of entered forbearance since the start of the pandemic.
Now forecast that our lifetime take up rate will increase an additional 20 basis points to eight 1% down from our eight 5% expectation last quarter.
By the end of the first quarter 68 per cent of loans that had been on forbearance on eggs.
I did with predominantly positive outcome of.
<unk> 400000 loans or two 5% of the single family Guaranty book based on loan count remainder of the active forbearance at the end of the first quarter of these loans of about 10% were current.
The multifamily approximately 1.3 per cent of the current guarantee book based on U P. B had entered a forbearance agreement since the start of the pandemic of Euro.
Result of continued low take up rates and further economic stimulus, we have reduced our forecast of the lifetime of multifamily loan forbearance take up rate to 2% down from 5% of the fourth quarter over 70% of the $5 4 billion of.
U P. B of multifamily loans that have entered forbearance to date has since successfully exited and either reinstated liquidated or entered of repayment plan.
Only 23 basis points of the multifamily Guaranty book remained an act of forbearance at the end of the first quarter.
As we have previously noted we accrue interest on COVID-19 effect of delinquent loans, when we have reasonable assurance of being able to collect our evaluation of whether collection that is reasonably assured considers the probability of default the current value of the collateral and any proceeds that are expected from contractually.
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As of March 31st we have accrued $1 $8 billion of interest on past due loans in forbearance outstanding against which we have recognized the 185 million credit provision.
Another impact of COVID-19 forbearance in the first quarter was our advancing $622 million of single family of principal and interest primarily related to past due loans in forbearance to ensure timely payment of MBS investors.
Looking forward at the single family loan does not resolve in the either remains nonperforming for a prolonged period or enters of flex modification and we are generally required to purchase it out of trust.
At quarter end 88 billion of single family U P. D was in forbearance, including including 70 billion.
And that was 90 plus days delinquent.
We currently expect that some loans in forbearance at the end of the first quarter of May eventually need to be purchased out of trust mostly in 2022.
While we do not expect these purchases to have the material impact on our financials largely because of our credit allowance already reflects expected lifetime losses for these lungs. These purchases will be added to our retained portfolio.
Our net worth at the end of the first quarter was $30.2 billion, an increase of 5 billion from the fourth quarter.
Our estimate of total capital requirement.
Under the new enterprise regulatory capital rule would have been approximately 190 billion.
I wish you approximately 140 billion would need to be on common equity tier one or CET one capital.
Regulatory buffers represent approximately $75 billion of these requirements.
Our estimate of capital requirement grew by about 5 billion quarter over quarter as a result of the growth in our ROE.
The action of benefits from credit risk transfer transactions.
We are permitted to retain earnings for the foreseeable future under the terms of the most recent senior preferred stock purchase agreement Amendment and we continue to evaluate how to best meet our capital requirements in a timely and prudent manner.
Looking at the year ahead, we continue to expect strong real gross domestic product.
The Pea and employment growth of the pace of vaccination programs improved and many COVID-19 related restrictions are being lifted.
Additionally, we anticipate the recently passed stimulus Bill and the continued buildup of household savings will support greater consumer spending levels.
Nonetheless, economic risks and uncertainty remains the possibility of new COVID-19 variance of merging the extent of consumer willingness to return fully to pre pandemic economic activity the impact of potential signs of supply chain disruptions and the pace of future inflation already represent risks are out.
Look.
Home sales were minimally affected by rising mortgage rates through the first quarter two of further jump in interest rates is the risk we expect ongoing tight housing supply to drive strong home price growth of nearly 9% this year, but the lack of for sale inventory could remain a headwind for home sales.
While we project the mortgage purchase originations to increase by about 15% to one nine trillion in 2021, we.
We expect total originations to decline by around 12% of two four trillion as we expect refinance demand to decline.
We expect lower refinance volumes were all affect our financial results of fewer loan prepayments will lead to lower amortization income.
The record refinancing volume has driven significant growth in amortization income in the last year in.
In the first quarter net of amortization was $2 5 billion compared to $1 5 billion in the first quarter of 2020.
This growth in net amortization occurs as mortgage prepayments accelerate the recognition of the revenues that would otherwise have been amortized into our income statement over the contractual life of the mortgage.
As I noted 75 per cent of our single family acquisitions in the first quarter and about two thirds of our 2020 acquisitions were refinances by comparison refinances typically accounted for closer to 40% of acquisitions in 2017 to 2019.
We believe that refinance volume will remain elevated for the first half of 2021, but thereafter, we'll begin to decline as refinancing returns to more normalized levels.
Now, let me turn it back to Hugh So we can go to questions and answers.
Yeah.
The list, we're we're ready for your questions.
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 are a reporter and would like to ask a question. Please press star and then one on your telephone if you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment all lines will be muted unless you are asking the question.
Once again to ask a question. Please press star and then one on your telephone we will pause for a quick moment to assemble the queue.
Alright, and we will go to our first question from Bonnie <unk> with National mortgage news.
Please go ahead.
Alright, thank you.
I wanted to ask about two things if I could one was about the mention of addressing some of the Rachel GAAP and the market I wondered if you had a particular initiatives or programs that reflect that and the other one was.
Related to the caps and some of the pricing adjustments I'm wondering if you could tell me all of a bit about how you or anything like that.
Okay terrific Bonnie it's you all.
I'll take the first one of theirs Theres a lot of.
Lot of different things in the.
The flight on the ratio of equity topic the.
Causes of structural discrimination of an equity or complex and you know as you know some of them stretch back decades, maybe even centuries of bring on you look at it.
Whether it's been credit files, lower FICO scores higher LTV ratios struck reload structurally lower home values.
Communities of color borrowers of color generally pay higher mortgage costs.
The noted before in the other forms solutions the fly the actions of the city of organization the required partnership with the mortgage industry the advocacy community regulators local national policymakers.
We care a lot about addressing an equity of housing we're intent on doing our part to see.
Sensible solutions with the old rule groups and we're redoubling our efforts on what we had Fannie Mae can do now the one area of the immediate focus is expanding credit education for it financial literacy education, so borrowers of call. It the better informed about credit in the process of buying a home with you.
So are the owning the home so that they can be they can take steps to be better prepared to become successful.
Long term long term owners, there's actually a quite the.
The surprising level of the level of the lack of understanding of it all income levels of what the costs are about in the home. We believe these efforts will help build the foundation for sustainable long term holder of Richard for those in the goes in the underserved the underserved groups.
We're committed to helping borrowers and writers across the country, one of rent and affordable place to go home and we take the commitment seriously given our role on the housing market.
Our permission we worked to safeguard.
The mortgage practices from the unintended discrimination.
We're very fortunate to work in the culture, where the.
Our employees make sure Wendy and housing.
Priority.
So the there.
I'd say generally stay tuned.
The the refi refi now.
<unk>, which was announced the other day as an effort to help low and moderate income borrowers take advantages.
The monetary stimulus.
The lower lower rates.
That's just one of the one of them.
But the things that we have in play and so I would just encourage you to watch the space for a traditional news because it says it is an area that we intend to make the significant differences.
But of course, only we can only do it if we're working in concert with the entire industry.
Your second question.
<unk> was on the P. S P. A I believe in the.
And of those amendments and the.
Certain of the certain restrictions due to the 7% cap on the second homes.
On Investor properties, we have the.
Yet to see any net.
Real impact of the acquisitions as the result of the amendment, but we're taking steps to the movement to consider.
Additional revisions of our business activities in order to ensure compliance with those so with those covenants and of those covenants. We're currently not in compliance with those as disclosed in the in the queue help us come into compliance with the 7% cap on the second homes of Investor properties.
The old singles day every lenders to work cooperatively with us to manage the sale of these loans to us to be at or below the 7% of their total of year to date.
<unk>.
You know what this means the lenders.
Below the 7% limit per year to date sales, we requested that they please maintain the sales of loans secured by seconds and industrial properties out of below their current year to date levels. If the above the 7% limit per year to date sales. We requested the day. Please decrease their sales of these loans secured by the second homes of investment properties down to the 7% level by the.
By June, but you're the first the 21.
Well I understand the account team of work really manage their sales of these property types to help us ensure that the wrong sales are at or below the knee the threshold and well continue to monitor deliveries of the second home and investment property loss in order to address the restrictions of the P. S. P. A member of the day announce other changes to our requirements of the future and that sort of it.
Answers your questions.
So it was there is there.
There are pricing change made in conjunction with those caps as well that's what it sounds like but I want to make sure I heard that right.
Oh, Hey, Bonnie were you referring to my comments on the multifamily managing within them.
<unk>.
Okay, maybe the yeah.
Okay Yeah.
Entirely made up of that business, yeah very differently.
We're dealing with the commercial borrowers.
We've always managed vary the pricing has always been very dynamic depending on demand and supply obviously, we havent I mean its supply.
And you know that given that some of the other market forces have been out of the market.
We've we've increased our prices the slowdown some of the demand is and we've been able to maintain that.
Hi, guys just starting from the confusion I understand thank you.
And our next question will come from Andrew Ackerman with the Wall Street Journal. Please go ahead.
Oh, hey, thanks for doing the call.
I just was wondering if you had an idea or estimates for.
The pick up rate will be on the refi now program that you just announced.
Yeah, Andrew Thanks for the question no. We don't we don't really know.
Yeah.
We are we hope that are working with other industry partners it'll be substantial but at this more of a level.
Okay. Thanks.
Thank you at this time I see no further questions in the queue I will now turn it back over to the Fannie Mae Chief Executive Officer Hugh R. Frater. Please go ahead Sir.
Well. Thank you everybody for joining us today of there's a there's a lot going on and we look forward. The Jive was an excellent. Thanks.
And this concludes today's call. We thank you for your participation and you may now disconnect.
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