Q2 2021 Federal National Mortgage Association Earnings Call

Mhm.

Yes.

Hum.

Hum.

And.

[music].

Good day and welcome to the Fannie Mae second quarter 2021results conference call. At this time I will now turn it over to your host Pete per cow, Fannie Mae as director of external communications.

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's second quarter 2021 financial results. Please note. This call may include forward looking statements, including statements related to the company's business plans financial results and loss mitigation activities as well as economic and housing market conditions.

<unk> of events May turn out to be very different from these statements the risk factors and forward looking statements sections and the Companys second quarter 2021 form 10-Q filed today and its 2020 of form 10-K filed February 12, 2021 describe factors that may lead to different results of it.

According to this call 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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 would now like to turn the call over to Fannie Mae Chief Executive Officer, <unk> freighter, and Fannie Mae President and interim Chief Financial Officer, David <unk>.

Thanks, Pete Good morning, and thank you for joining us as we discuss our 2021 second quarter results I will open with some key themes for Fannie Mae as we Mark the halfway point of 2021, and then I'll hand, it over to David Benson, our President and interim Chief Financial officer to discuss our results in more depth.

And the second quarter of Fannie Mae maintained its steady focus on our 2021 priorities first we're continued to help homeowners renters and the broader market and navigate through the pandemic.

But the last few weeks of shown COVID-19 is still with us on the national level. Our economy is recovering strongly of the pandemic continues to cast the uncertainty over the economy and it continues to have devastating effects for some communities.

Against this backdrop and consistent with our mission and we're continuing to help homeowners and renters looking for housing options that are affordable and sustainable.

And the second quarter, we provided 384 billion and financing to help people purchase refinance and rent homes and.

And we continue to help those struggling economically due to COVID-19 to understand their options through the here to help resources on our Fannie Mae website, especially with the end of the foreclosure and eviction moratorium.

Second we continue to make it a priority to support our employees underpinning our strong second quarter results of the efforts of our people and I'm very grateful for their dedication.

<unk> by our housing mission and that continued to deliver extraordinary work under challenging circumstances.

The progress on the pandemic continues we will continue to engage with our employees to develop a new flexible hybrid model for work at Fannie Mae.

Third this quarter again demonstrated our ability to advance our mission operate safely and soundly and grow our capital and the second quarter, We reported $7.2 billion and net income and increased our net worth to <unk> $7.3 billion.

We remain significantly under capitalized.

But these results are further evidence that our mission safety and soundness and capital building do not conflict with 1 another and fact that complement 1 another.

As we move into the second half of the year. We will continue to focus on these priorities. We also look forward to building a strong collaborative relationship with acting FHFA director of Sandra Thompson and her leadership team she and her.

And your team are already demonstrating the predilection for both thoughtfulness and action as they reevaluate a wide range of important issues.

Many people at Fannie Mae have worked with acting director Thompson over the years, and addition to being a strong professional regulator.

And where to be deeply committed to safety and soundness and to the mission of the housing enterprises.

Shortly after being sworn in and the acting director stated that.

Rod fair access to credit and stability for financial institutions work together.

<unk> of the nation's housing finance system Fannie Mae shares this conviction.

We also share of understanding that and her words quote there is of widespread lack of affordable housing and access to credit problems that are especially concentrated and communities of color and quote.

<unk> recognized that today's housing system has gaps that must be bridge and that the forces of the pandemic or making some of these gaps wider.

For example that in 2019 before the pandemic, 21% of owner of households, and 47% of Red are assholes, where cost burden spending 30% of more of the income on the housing costs and 2019, we estimate that home prices have grown by 23%.

Through June 2021, Meanwhile, income has grown by only 9 including government benefits and transfer of payments.

Just over 2 weeks ago, the national and low income housing coalition reported that of full time worker must now or and more than $20 per hour to read a modest 1 bedroom home and almost $25 per hour to read a 2 bedroom home.

As HUD Secretary Fudge highlighted and the preface to the report these wages and therefore these homes.

And the reach of too many Americans.

So despite the top line numbers for the economy housing and Fannie Mae we recognize that the housing market. We serve is not sort of in the needs of everyone. We.

And we need to change that actions, both large and small and needed to move housing and the right direction.

1 small step we took this quarter was to launch refi now new option that makes it easier for qualifying low income homeowners to refinance and reduce their housing costs refund and now its been and the market for less than 2 months, but we're seeing good application volume and acquisitions are starting to flow through.

On a related note I also invite you to read our recently issued third of annual Green Bond impact report, which provides more transparency into what worked and become a leading environmental social and governance company.

<unk> reported for the first time includes information on our single family of Green financing work.

Fannie Mae is proud to be the largest cumulative issuer of green bonds and the world.

2012, our green financing work has helped prevent and estimated 634000 metric tons of cotwo equivalent that roughly translates into moving 137000 passenger cars from the road.

Building of the housing finance system that is more affordable fairer and more resilient.

And then there's equal to today's great housing challenges is the long term project.

Every move we make and that project will be made responsibly with sustainability of safety and soundness and the long term interest of homeowners renters, and our business and mind.

And that thoughtfulness must be paired with urgency because of the need for a better fairer housing system is urgent.

With that I'll turn it over to day Benson, who will take us of the numbers over the year, Dave. Thank you Hugh.

We're now more than 15 months into the COVID-19, global pandemic and the overall economy is recovering more strongly and we and many others and anticipated a year ago.

And that the second quarter was interesting is an understatement.

GDP grew at 6.5% in the second quarter compared with the slightly over 2% trend that we've seen in recent years.

Home price appreciation, which historically robust driven by housing demand fueled by continued low interest rates and economic stimulus interacting with low levels of housing supply relative to demand.

Q2 home prices increased approximately 6.3%, resulting in first half of 2021 home price growth.

And 5%, which is the highest 6 months of home price growth rate and the history of the Fannie Mae National home price index.

Both refinance and purchase markets remained vigorous thanks in part to sustained low interest rates.

These factors drove 7.2 billion and net income per the quarter the highest since the first quarter of 2013.

And $8.4 billion and net revenues the highest since the first quarter of 2014.

As a result, our net worth increased to 37.3 billion, improving our safety and soundness as well as our ability to deliver on our mission and reducing the risk of a draw on the senior preferred stock purchase agreement with Treasury.

That said, we remain under capitalized as you noted.

I'd like to transition out of the largest contributors to our second quarter results.

Credit related income and net interest income both of which increased quarter over quarter.

Credit related income increased approximately $1.8 billion from the first quarter, resulting and credit income in the second quarter of approximately $2.5 billion mainly.

Mainly due to strong actual and forecasted home price growth, which reduced our loss allowance by $1.1 billion.

Re designation of loans from held for investment the held for sale to support loan sales of higher risk loans, which contributed $678 million in games.

And the continued improvement and our outlook regarding the impact of Covid, driven and uncertainties, which resulted in approximately $233 million benefit and the second quarter.

Net interest income increased $1.5 billion and the second quarter of 2021 compared with the first quarter of 2021, driven primarily by an increase of net amortization income, particularly in the beginning of the second quarter.

Single family mortgage loan prepayment activity slowed throughout the second quarter of 2021 compared to the first quarter of 2021.

However, refinancing activity, while down from the first quarter levels remained strong due to the continued low interest rate environment, where the 30 year fixed rate mortgage hovered around 3% from much of the quarter.

We also experienced a 1.2 billion dollar shift from fair value gains and the first quarter, the fair value losses, and the second quarter driven by a decrease in treasury yields which drove losses on commitments to sell securities and fair value debt as prices rose.

Now as I mentioned at the top this quarter's results were against the backdrop of a strong economy.

Economy continued low interest rates and a surge and home price growth.

So now let me turn to our business segment results.

And our single family business net income was $6.5 billion and net revenue.

<unk> were $7.4 billion Boes.

Both of which increased quarter over quarter impacted by the same factors driving our enterprise results.

Second quarter of single family total acquisitions remained strong at $373.3 billion down slightly from the heights, we have seen over the past couple of quarters.

We experienced a decrease and refinance acquisitions and the second quarter with record purchase mortgage volume of 129 and $5 billion.

Nearly 50% of which were for first time homebuyers.

And remarkably over half of our single family of Guaranty book of business has been originated in the last 18 months given the low interest rate environment.

Credit characteristics of the single family conventional Guaranty book of business remains strong with a weighted average mark to market loan to value ratio of 55% and a weighted average FICO credit score of 752.

Our single family serious delinquency rate or SDK rate at quarter end was 2.0 of 8% down 50 basis points from March 31. This decline demonstrates the strength of the economy and household income support from past stimulus bills.

It also illustrates the success of the workout options, we are offering to borrowers and forbearance due to COVID-19.

Now excluding loans in forbearance of our single family of DQ rate declined slightly quarter over quarter from 66 basis points to 64 basis points.

Note that we provide several cuts of bulk of our acquisition and full book data and our quarterly financial supplement published on our website in conjunction with todays 10-Q filing.

And when our multifamily business net income was $645 million and net revenues were $986 million.

Bolt up quarter over quarter, driven by continued to increase and guarantee fee revenue on a growing book of business and strong pricing on new acquisitions Act.

Acquisitions, and the first half of 2021 of $32 billion.

Were relatively flat compared to the first half of 2020.

Given the $70 billion cap that the FHFA established on new multifamily business volume for the year. This leaves approximately $38 billion of capacity for the second half of 2021.

Quarter over quarter acquisitions declined from $21.5 billion.

The $10.9 billion based on 2 primary drivers.

First market competition returned in earnest during Q1 as Covid impacts began the normalized reducing our volume and the second quarter.

And as a consequence, our market share return to more typical levels.

Second we reduced our second quarter acquisition pace in order to manage to our volume cap.

Yes, all of our multifamily <unk> rate was 53 basis points as of June 30 down from 66 basis points as of March 31.

This decline is driven by loans that were and forbearance and have since completed repayment plans or otherwise reinstated.

Our multifamily <unk> rate, excluding Covid forbearance was 3 basis points unchanged compared to the end of the first quarter, representing continued strength of the cash.

Credit profile of our book of business.

Now turning to impacts from the Covid pandemic, new loans entering forbearance continued to slow during the second quarter as the economy labor markets recover.

For our single family loans are lifetime, and take up rate forecast of 8.1% based on loan count is unchanged since last quarter, notably over 8% of our book by loan Count entered the Covid forbearance and we expect very few additions going forward.

As of June 31, 8% of our single family book remained in forbearance of borrowers who have exited COVID-19 forbearance as of June 30, 31% prepaid their loans.

Nearly 31% never missed a payment or reinstated their loans, which means they paid their missed payments and a lump sum.

And nearly 31%.

The borrowers entered in the Covid payment deferral of Fannie Mae program, and which were born came in sort of deferred into a non interest bearing balance due and payable at maturity of the loan or earlier payoff.

Encouragingly as of June 30, 96% of loans and Covid payment deferral were current.

As we approach the pandemic 18 months, Mark and reach forbearance and extension limits, we may see more borrowers who have not resolved their hardship and.

Into loan modifications.

These include the flex modification per covered to which we recently announced changes that provide and interest rate reduction for all borrowers regardless of their mark to market loan to value ratios the.

The moratorium on single family and foreclosures put in place last year as a result of Covid expired on July 31 of this year.

However, beginning August 1st our Servicers, we're required to comply with the Cfpb's final rule on federal and mortgage servicing regulations, which was announced in June and precludes the initiation of certain and foreclosures through year end.

As such we expect foreclosure volumes to be limited throughout the rest of this year.

And multifamily are lifetime forbearance take up rate forecast of 2% based on unpaid principal balance is also unchanged since last quarter.

1.6% of the March 2020, multifamily book has entered forbearance, so far with no new loans and entering forbearance and the second quarter.

Over 70% of the active loans the enter forbearance exited through repayment plans or reinstated with approximately 7% defaulting on their forbearance agreements.

Only 0.2% of our multifamily book remains in active forbearance.

So finally, let me share some thoughts and the economy.

While the initial surge and growth driven by the reopening of the economy has passed we expect continued economic strength throughout 2021 of those significant risk to the outlook remain including the risks relating to labor shortages and supply chain disruptions and the potential for higher inflation and the impact of the Delta variant and.

And the U S and abroad.

We have revised our home price growth estimates for 2021 from 8.8% to 14, 8% based on strong price momentum and a continued expectation of tight supply.

We expect home price growth to moderate through the remainder of the year and into 2022 is the demand and supply dynamic begins to normalize. We also expect total 2021 single family market originations to decline somewhat relative to the prior year and the mix of originations is expected to ship.

In 2021, we expect purchase originations to increase of 11% relative to 2020.

2 of total of 1.8 trillion.

Driven by higher home sales and strong home price growth as the market recovers from the pandemic.

For the second half of this year, we expect refinances to fall due to a modest expected rise in interest rates, which will likely drive fewer loan prepayments and lower amortization income and the first half of this year.

Now and multifamily our outlook for the remainder of the year has improved we expect the volatility and rent growth stemming from pent up demand to last through the summer and begin to normalize the early autumn as local economies further stabilize.

And though we continue to be cautious given the risks to the outlook you mentioned the Bob while.

And while the federal eviction moratorium has now expired and the outcome of the exploration is unknown, the recent increases and job growth and wage growth support of more optimistic outlook for rental payments.

In 2021, and we expect multifamily market originations to increase to between $315 billion and $325 million.

Driven by continued market recovery from the pandemic.

So with that let me turn it back to you Hugh.

Thank you, Dave and thanks to all of you for listening.

Yeah.

[music].