Q3 2021 Federal Home Loan Mortgage Corp Earnings Call

Good morning, and thank you for joining us for our presentation of Freddie Mac's third quarter, 2021 financial results and Jeff Markowitz Deputy Chief.

Administrative officer, we are joined today by our CEO, Michael Devito and by our CFO, Chris loud before we begin we'd like to point out that during the call. Mr. Davita when Mr. Lown may make forward looking statements based on assumptions about the company's key business drivers and other factors changes in these factors could cause the company's actual results to.

Materially vary from its expectations.

<unk> of those factors can be found in the company's quarterly report on Form 10-Q filed today you will find the 10-Q earnings press release and related materials posted on the Investor Relations section of Freddie Mac Dot com.

Our commentary today will be limited to business and market topics. As you know we cannot discuss proposed legislation concerning Freddie Mac. This call is recorded and a replay will soon be available on Freddie Mac Dot com.

Asked at the call it not be rebroadcast or transcribed with that I'll turn the call over to Freddie Mac's CEO Michael Devito.

Good morning, and thank you for joining us to review another strong quarter for Freddie Mac.

Last quarter was my first time speaking with you as CEO and at that time I shared our priorities for the company.

Today I'd like to briefly revisit those priorities and highlight some of the progress we have made in moving our company forward to deliver real results for homeowners and renters across the country.

Then our CFO, Chris Lown will walk you through our financials, let's start with our top priority, serving our mission of providing liquidity stability and affordability to the housing market. This is Freddie Macs primary purpose and we're here to serve that mission expansively, including helping lenders of all size serve their communities.

Issues of housing in equity and providing access to sustainable and affordable home financing it makes home possible for owners and renters throughout the economic cycle and across the country.

Our impact for single family borrowers in the third quarter was clear.

We enabled 415000 families to purchase a home and provided $299 billion of liquidity to the single family market. It.

It was the company's best quarter for home loan purchases since at least 2010.

More notable given the ongoing significant deficit of affordable starter homes in the country. We supported a 171001st time homebuyers in the third quarter or 46% of our purchase loans.

Freddie Mac also helped approximately 612000 families refinance into more affordable terms that was down from the previous two quarters were record low interest rates generated a significant amount of activity.

But it's still one of the best quarters for refinance we've had in our history.

Despite the declining pace of refinances, both purchase loans and refinance loans remain at roughly double the volume prior to the pandemic.

Low rates continued to drive much of the company's refinancing activity that was a benefit to existing homeowners, but unfortunately not everyone has taken advantage of the strong housing market.

For example, many black borrowers may be less likely to meet the traditional credit standards necessary to qualify for a mortgage.

This is often as a result of past patterns of inequality.

And recent Freddie Mac research is documented ongoing house price appraisal gaps.

More difficult to buy or sell a home in diverse communities.

Meeting these challenges and others like them as an essential part of our mission and Freddie Mac is uniquely positioned to do this work for.

For example, we're helping individuals' improve their understanding of credit through consumer education. We recently celebrated 20 years of our credit Smart program by launching a new comprehensive curriculum aimed at helping consumers learn about the importance of building maintaining and using credit. So they can take the reins on there.

Financial futures.

We're also actively exploring and evaluating alternative credit score models as well as technology that can help expand homeownership opportunities responsibly.

And we're working with stakeholders to identify root causes housing disparities in minority communities.

Create and test viable solutions to promote equity.

Freddie Mac also recently launched refi possible a product with expanded eligibility requirements. So low income families can now qualify for refinancing and save on monthly mortgage payments.

Recently, we announced would be further expanding that product, so borrowers, making at or below 100% of area median income will be eligible.

Just this month, we announced plans to offer at least $3 billion in single family Affordable housing bonds. This new bond program will support affordable homeownership and serve historically underserved markets.

This effort is well underway with the October offering of $285 million in uniform mortgage backed securities.

Backed by loans purchased through our home possible program.

Since its inception home possible has helped more than half a million low and very low income families finance homeownership.

Let me now turn to our multifamily segment.

We injected $18 billion of liquidity into the market to help fund 161000 rental units in the third quarter.

As with Homeownership, we are committed to helping improve housing equity and affordability for renters and we believe we have an important role to play in the affordable rental space as well.

To that end I'm pleased to report that better than 94% of the rental units, we financed our affordable to families, earning at or below 120% of area median income.

And 68% were affordable to families, earning at or below 80% of Ami.

Further Freddie Mac has provided approximately $500 million in low income housing tax credit equity investments each year since re entering this market in 2018.

In that time, the programmers topped 120 investments spanning underserved communities in 26 States, Puerto Rico, and Guam and provided more than 13000 homes for households that struggle to find safe and affordable rental housing.

In September FHFA increased our low income housing tax credit equity cap to $850 million. Our multifamily business is now ramping up these investments to support the creation and preservation of affordable housing the targets. The most underserved communities throughout the United States.

We're also positioning ourselves to do more business under the recently increased volume cap for our multifamily business.

It was increased from 70 billion for 2021 to 78 billion for 2022.

Further we have committed to a multifamily target of at least 50% mission driven affordable housing and we're increasing the target for housing affordable to families, making at or below 60% of IMI from 20% to 25%.

Additionally, in Freddie Mac multifamily has a social bonds program is providing liquidity to financial institutions with a distinct mission of addressing affordability challenges.

Or for financing housing targeted to underserved populations considered to be among the most vulnerable.

You can expect that these equity and affordable focused activities will be critical components of the inaugural Freddie Mac equitable housing finance plan, we will submit to FHFA at the end of 2021, we.

We believe this plan will be a roadmap to achieving vitally important components of our mission.

Last quarter I also spoke briefly about three areas that support Freddie Mac's mission first we must remain an outstanding risk manager you see that in our emphasis on credit risk management, both in our single family and multifamily businesses.

In the third quarter, we built upon our role as the largest cumulative issuer of single family credit risk transfer or CRT by keeping up a steady form of issuance.

We're managing our CRT program very deliberately in September we conducted our first ever tender offer for certain stacker notes.

This action effectively reduces costs related to credit risk transfer by repurchasing stacker tranches that no longer offer an economic benefit.

Second we're growing talent for today and tomorrow.

For example, we recently introduced the technology recruiting program to further increase diversity by creating a path into information technology for mid career professionals.

We've also built on our longstanding commitment to diversity equity and inclusion with the addition of diverse new leaders to our senior operating committee, including Dionne Wallace Oakley, Chief Human Resources Officer, and Jerry <unk>, Chief compliance Officer.

And finally, we must consistently deliver strong results.

Chris <unk> will run through the details and we're pleased that the earnings we announced today should approximately 19% year over year growth in net and comprehensive income, which enabled us to add $2 $9 billion to our net worth.

These strong results fuel our support for borrowers renters in the market.

Now to run you through the details of our financial performance I'll hand, it over to Chris loan.

Thank you Michael and good morning.

As Michael mentioned I'm happy to report that Freddie Mac had another strong quarter.

We earned net income and comprehensive income of $2 9 billion and $5 billion increase from the third quarter last year.

This increase was primarily driven by continued growth in our single family portfolio and a decline in credit related expenses.

Third quarter net revenues totaled $5 2 billion, an increase of 4% compared to $5 1 billion in the prior year quarter. As a result of higher net interest income, partially offset by lower noninterest income.

Net interest income increased by 28% year over year to $4 4 billion.

Mainly driven by a higher net interest income in the single family segment.

Noninterest income was down from the prior year quarter due to lower investment gains mostly in the multifamily segment.

Investment gains fell 66% due to lower gains from mortgage loan purchase and securitization activities in multifamily impacted by less favorable market spreads.

Realized house price appreciation and improving economic conditions drove the credit reserve release of $243 million in the quarter, resulting in a lower credit related expense of $194 million.

That was down from $614 million for the third quarter of 2020, which was driven by the negative impact of the COVID-19 pandemic.

Turning to our individual business segments and single family net income increased by $746 million from the prior year quarter to $2 billion.

This increase was driven by a higher net interest income of $912 million as a result of 23% year over year growth in the single family mortgage portfolio and a higher average guaranty fee rate of three basis points.

In addition credit related items declined by $417 million from the prior year as we released reserves due to realized house price appreciation and improving economic conditions.

Initially offset by higher credit enhancement expense.

At the end of the third quarter, 50% of our single family portfolio had credit enhancement coverage.

New business activity of 299 billion increased from $288 billion in the second quarter of 2021, but decreased from $337 billion in the third quarter of 2020, as we saw lower refinance activity.

Year to date, our new business activity is $949 billion a.

A 34% increase year over year.

We have provided funding for approximately $3 3 million single family homes year to date on.

On the credit side, the serious delinquency rate continued to decline from the pandemic peak of 3.0% to 4% in the third quarter of 2020, ending the current quarter at 146%.

As for forbearance, approximately 1.15% of loans in the single family mortgage portfolio based on loan count were in forbearance as of September 32021 down from 295% in the prior year quarter.

During this quarter, we helped approximately 73000 families remain in their homes through loan workouts.

Looking to multifamily the segment reported net income of $891 million.

A 25% decrease from $1 2 billion in the prior year quarter.

<unk> net investment gains drove the decrease due to less gains from market spreads and lower initial pricing margin gains on new loan commitments.

Multifamily saw new business activity of $45 billion year to date, a $3 billion decrease versus the prior year period, driven by a reduced loan purchase cap.

The multifamily mortgage portfolio increased by 10% year over year to $404 billion.

The delinquency rate, which does not include multifamily loans in forbearance was 12 basis points as of September 32021 down from 15 basis points at the end of June.

As of September 30th approximately 94% of the multifamily mortgage portfolio was covered by credit enhancements up from 91% in the third quarter of 2020.

On the capital front, our capital position, our net worth increased to $25 3 billion at the end of the third quarter.

That represented an 82% increase compared with the prior year quarter, and a 13% increase from <unk> 2021.

Let me close this section by mentioning some of the real world impacts behind some of these numbers.

Since the start of the pandemic, we have helped hundreds of thousands of at risk homeowners and renters remain in their homes, while maintaining the stability of the U S housing finance system during the COVID-19 pandemic.

Overall during the pandemic.

We extended forbearance to more than 830000 single family borrowers approximately 129000 remained in forbearance as of September 30th.

We helped over 670000 families stay in their homes, thanks to loan workouts.

Similarly, we extended COVID-19 related for brands to approximately 1450 qualifying multifamily properties protecting tenants and about 135000 units from eviction for nonpayment of rent.

And with that I'll turn the call back over to Michael.

Thank you Chris it's good to see such solid financial results combined with outstanding risk management, and a commitment to developing and recruiting outstanding talent.

But let me say again that all of this work is in support of mission.

Freddie Mac is at its best wanted to deliver strong financial returns and serves its mission to the nation by helping lenders of all sizes addressing issues of housing in equity and providing access to sustainable and affordable home financing.

Thank you again for joining us and I look forward to speaking with you again next quarter.

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