Q4 2021 Federal National Mortgage Association Earnings Call
<unk> partner and co head of Brookfield infrastructure that business overseeing the Americas. Thank.
Thank you for joining us for an introduction to Brookfield infrastructure debt funds III.
Before we begin a reminder, that the views and opinions expressed in this webcast are those of the speakers and in general in nature. They do not constitute financial or other professional advice and there are no guarantees of future performance.
In terms of the agenda for the presentation I'll begin with an overview of the fund offering.
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Good day, and welcome to the Fannie Mae fourth quarter and full year 2021 financial results Conference call. At this time I will now turn it over to your host Pete <unk> Fannie Mae's director of.
External communications.
Hello, and thank you all for joining today's conference call to discuss Fannie Mae's fourth quarter and full year 2021 financial results. Please note. This call may include forward looking statements, including statements related to the company's business plans and strategies, including those related to its Michigan and capital and the impact of those plans and strategies.
Gnomic and housing market conditions, and the company's business loan performance and financial results future events may turn out to be very different from these statements. The risk factors and forward looking statements sections of the company's 2021 and Form 10-K filed today describe factors that may lead to different results. A recording of this call may be posted on the comp.
<unk> web site.
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, QR freighter, and Fannie Mae Chief Financial Officer, Chris is C. Halle.
Welcome and thank you for joining us to discuss our 2021 financial results.
I'll provide a few opening comments then Chris of Halley, who I'm very pleased joins me for the first time, it's our Chief financial Officer will speak to the results in more depth.
2021 results reflect several important storylines.
Some of the key drivers of our earnings were linked to market conditions that were specific to last year and are not likely to last.
The other story lines are more fundamental and will shape out work for years to come as we positioned the company to help address the extraordinary affordability environmental and social challenges confronting housing.
First let me call out a few facts specific to last year.
What are your 'twenty, one was a strong year for our business as we continue to be a crucial source of mortgage financing at an economy that demonstrated growth. Following the decline in 2020 are.
We recognized $22 2 billion and net income nearly 88% higher than the year prior and we ended the year with $47 4 billion and net worth.
Remains significantly under capitalized.
Eric we're four trillion dollar balance sheet.
Provided $1 four trillion of liquidity to the single family multifamily markets, enabling the purchase of one 5 million homes.
$451 3 billion of single family home purchase loans, we acquired was the highest dollar volume on record.
I'm pleased to report that nearly 50% of those loans were to first time homebuyers also a record for us that's squarely aligned with our mission.
We also enabled the refinance of $3 3 million loans and funding for approximately 694000 rental units.
Low interest rates, while higher than in 2020 sustained a tailwind for the economy and drove continued demand for home purchase and refinance mortgages.
These low interest rates, coupled with strong housing demand and supply constraints supercharged home price growth.
Last year also saw 19% single family home price growth.
Annual growth rate in the history.
Fannie Mae's home price index.
That.
On top of 10.4% home.
Price growth in 2020.
The negative flip side to this price appreciation is it more families had been priced out of the market.
Our view too many homeowners and renters face a market where supply was low prices were high.
At affordable options to buy or rent.
Scarce.
This is making it even harder to close demographic gaps in homeownership and affordability, including gaps related to race or ethnicity.
These gaps are closely related to other forms of economic disparity, particularly household wealth gaps between white families and families of color.
This dynamic unfortunately represents a fundamental persistent challenge in the U S housing market.
And it underscores the importance of Fannie Mae's ongoing mission to advance equitable and sustainable access to homeownership high quality affordable rental housing.
We are making this mission our first priority for the foreseeable future just as we are determined to be a global financial services ESG leader.
We see it as a natural alignment with our charter and our mission.
Through the course of 2020 , one our mission first focus yielded important results in the spring for example, we launched refi now.
Up low income homeowners take advantage of low interest rates and reduce their monthly house payments.
Summer.
We introduced a change or a desktop underwriter system, making it possible to include positive rental payment history into credit assessments, which can help first time homebuyers.
Enabling us to see borrowers, including many people of color who in the past may not have even applied for a home loan and some of them end up with lower monthly mortgage payments and what they were successfully pain and rent.
Later in the year, we topped 100 billion of Green bond issuances to.
This milestone demonstrates our leadership in supporting the greening of U S housing and reducing the sector's carbon footprint.
And in December we issued our first ever sustainability accounting standards Board report.
These are just a few examples of how we delivered on our ambition in 2020 one as.
As we move into 2022, we are adding to this momentum.
Soon we look forward to publishing an equitable housing finance plan.
The societal and economic benefits of affordable sustainable homeownership and rental housing are well accepted.
Homeownership, coupled with our self amortizing mortgages, along contributed to wealth creation, especially for middle class families, who may not have the opportunity to accumulate assets elsewhere.
Unstable inadequate as substandard housing is closely related to a hosted negative long term consequences, including health outcomes and educational attainment of a broader societal impact.
Notable housing finance plan is focused on knocking down barriers faced by underserved homeowners and renters across the U S.
Initial focus on black homeowners and renters.
Isn't this plan into action will be a major focus of Fannie Mae in 2022 and beyond.
One essential element of our work on housing the equity is homebuyer education.
Early January 2022 we introduced home view.
Have you is a free online consumer education resource for every step of the homeownership journey.
It provides consumers the tools and information to navigate this complex process. We believe it will create better informed successful homeowners the kind of homeowners where the bedrock.
Safe sound housing system.
Already more than 16000 learners, who have registered on all of you and more than 12000 and have completed the first time home buyer of course.
AC terrific of completion that they can share with their lenders.
In addition to introducing practical solutions for homeowners and renters. Fannie Mae is also sharing important research on housing affordability equity and the growing impact of climate change and natural disasters recent.
Once published papers on closing costs for first time at low income homebuyers not potential appraisal bias in refinance transactions.
Our researchers aimed at deepening our understanding of the barriers to housing affordability and equity spring conversation about ways that we as an industry and knocked down those barriers.
Continue to add to this work the months to come.
We also have a team focused on evidence based data driven climate impact.
Work in this area is a priority for US right risk management perspective, we want to partner with stakeholders across the public and private spectrum.
To address both near and longer term challenges, particularly those at the Nexus of racial equity.
The foundation for all of our emission work is the safety soundness and sustainability of our business.
For 2021 results demonstrate that Fannie Mae continues to focus on safety and soundness.
Chris will discuss in more detail Fanny Mae generated strong earnings in 2020 one.
It improves our financial strength and it adds to the overall safety and soundness of the housing finance system.
For the past two years nearly two thirds of our single family book of business has turned over the quality of our new business is high.
Pricing of that business does not reflect the capital requirements of our regulatory rule.
One of our most important tools for achieving our mission at ensuring safety and soundness is pricing.
January for example, we announced price increases on loans for second homes in certain high balance loans.
We structured these changes to ensure that they don't adversely affect low and moderate income borrowers.
As we move through 2022, we will closely monitor the market and if needed we will adjust our pricing and other business practices as warranted balancing as always our charter our mission and safety and soundness.
But in 'twenty, two will be an important year for housing and for Fannie Mae.
I look forward to working closely with FHFA in our housing partners to support the market with a mission first approach in 2022 and beyond now I'll turn it over to Chris.
Thank you I appreciate the opportunity to discuss our 2021 financial results, which as you mentioned to reflect the strength of our business and also reflects several market related factors, including a strong economy exceptional home price growth and a continued low interest rate environment.
2021, GDP grew at a five 5% pace compared to a decline of two 3% in 2020. Thanks to the continued momentum of the economic recovery and the impact of the COVID-19 pandemic as Hugh mentioned single family home prices grew at 19%.
Interest rates increased relative to the previous year. They remained low with a 30 year fixed rate mortgage averaging 3%.
These factors contributed to our recognition of 22.2 billion and net income as a point of comparison, we recognized $11 8 billion and net income in 2020.
Now we recognize strong net income last year, we remain significantly under capitalized as a point of reference the deficit of our core capital to our statutory minimum capital with 100.3 billion as of the end of the last year. It's important to note that the enterprise regulatory capital framework.
Require substantially higher levels of capital than our statutory minimum capital further our efforts to build sufficient capital to meet our requirements can be significantly affected by growth in our book of business, which can drive increases in our required capital that offset or even outpace future.
<unk> and our available capital we.
We will begin reporting capital amounts as determined under the enterprise regulatory capital framework, and our Q1 2022 results.
Now turning to the largest contributors of our results from 2021 compared to 2020 credit related income and net interest income.
Ignite $5 1 billion of credit related income last year, and nearly 6 billion improvement compared to the $855 million expense, we incurred in 2020 credit related income in 2021 was driven primarily by strong actual and forecasted home price growth and increase in the volume.
Re designation and a reduction in the company's estimate of losses and expects to incur as a result of the COVID-19 pandemic. These results were partially offset by increases in interest rates.
Conversely credit related expense from 2020 was driven by the impact of COVID-19, and the associated economic downturn offset by higher actual and forecasted home prices lower actual and projected mortgage interest rates and the re designation of certain re performing single family loans from <unk>.
Held for investment to held for sale.
We also recognized $29 6 billion and net interest income in 2021, a $4 7 billion increase compared to the $24 9 billion amount recognized the prior year.
This increase was driven by higher base G fee income and higher amortization income throughout 2021.
Our base G fee income growth thanks to growth in our conventional guaranty book of business CAD three nine trillion $3 six trillion in 2020, coupled with an increase in our average charge guaranty fee single family refinances of $903 $7 billion in 2021.
<unk> drove significant prepayment activity, resulting in elevated amortization income during the year. Finally, we saw approximately $155 million in fair value gains in 2021 compared to approximately $2 5 billion and fair value losses, the previous year.
Fair value gains in 2021 were primarily driven by declines in the fair value of risk management derivatives and trading securities offset by the impact of hedge accounting.
Losses in 2020 before we implemented hedge accounting were primarily driven by declines in the fair value of commitments to sell mortgage related securities as prices increased during the commitment period.
It is important to note that we continue to expect the pace of home price growth to moderate in 2022, and we have already seen a decline in the volume of refinancings in the second half of 2021 as interest rates have risen.
These factors are likely to result in lower net revenues and credit provision or lower credit benefit over the next year when compared to 2021 I'll address some of these trends later in my remarks, let me now transition to our single family and multifamily business segments.
<unk> family, we reported 19.1 billion and net income and $25 7 billion in net revenues in 2021 impacted by the same factors driving total company results as a point of comparison, both net income and net revenues increase relative to 2020.
When we reported $9 9 billion in net income and $21 9 billion of net revenues single family acquisitions of 1.4 trillion dollars in 2021 remained at near record highs only slightly lower than 2000, Twenty's record volumes purchased acquisitions as a percentage of total.
Rose to 33% compared to 30% in 2020, and we expect to continue to see a shift to a purchase market as rates increase into this year.
As Hugh noted nearly two thirds of our single family book of business has been originated since the beginning of 2020, given this dynamic and our expectation of fewer refinances in the coming years.
In fact, our book to turnover more slowly, resulting in lower amortization income in future years than we saw in the 2021 and 2020.
In credit our serious delinquency or S. DQ rate continued to decrease to 1.25% as of December 31st last year down from 162% as of September 30th and 2.87% as of December a year ago.
The decrease in our <unk> rate was largely a result of the ongoing economic recovery and the decline in the number of single family loans and COVID-19, forbearance plans attributable in part to the workout options Fannie Mae offered to borrowers a.
Approximately <unk>, 7% of our single family Guaranty book of business or approximately 117000 loans remains an active forbearance as of December 31 of last year compared to 3% of our book at the end of 2020.
We expect the COVID-19 pandemic to result in a continued higher single family SD Q rate over the next several quarters compared with pre pandemic levels.
Finally, Fannie Mae re entered the credit risk transfer market in the fourth quarter of last year entering into five single family CRT transactions during the quarter between our Connecticut Avenue Securities and credit insurance risk transfer programs with these transactions, we transferred risks on a portion of approximately.
205 billion in U P D. At the time, we entered the trip we entered the transactions.
Shifting to our multifamily business, we reported net income of 3 billion in 2021, an increase from $1 9 billion in 2020, and net revenues of $4 3 billion in 2021 up from $3 5 billion in the prior year.
The year over year increase in net income was driven by a shift to credit related income of $511 million in 2021 from credit related expenses of 623 million the previous year, resulting from improved economic data and lower expected losses as the recovery from the <unk>.
<unk> continued and due to strong market fundamentals, including higher estimates of both actual and projected property values net.
Net interest income grew to $4 2 billion in 2021 from $3 4 billion in 2020 due to higher guaranty fee income from book growth and higher charged fees and higher yield maintenance revenues, resulting from an increase in prepayments.
We acquired 69 $5 billion in multifamily loans in 2021 relative to our 70 billion dollar volume cap for the year. In addition to this volume cap FHFA also required that at least 50% of our 2021 multifamily business volume the mission drip.
<unk> focused on specified affordable and underserved market segments and that a minimum of 20% of our multifamily business volume in 2021 must be affordable to residents at 60% of area median income or below based on our analysis, we met both Mitch.
<unk> requirements in 2021.
Fitch FAA has placed a 78 billion dollar volume cap on our multifamily business for 2022 up from a $70 billion cap. They assigned for last year, we expect that this cap and related mission driven requirements will continue to influence our acquisition strategy.
Turning to credit.
<unk> family as DQ rate decreased 2.42% as of December 31, 2021, compared to <unk> nine 8% as of December 31 2020.
This decrease was driven primarily by the ongoing economic recovery, resulting in loans that receive COVID-19, forbearance completing their repayment plans are otherwise reinstating. In addition to the single family credit risk transfer transactions brought to market in Q4 of last year. We also executed.
Two multifamily credit insurance risk transfer deals transferring risk on a portion of $19.8 billion and U P. B at the time, we entered into the transaction moving.
Moving along to our 2022 outlook, our economics team expects the housing market and larger economy to begin to enter a new normal in 2022 as the market disruption and policy responses stemming from COVID-19 pandemic subsides.
Specifically in 2022, we expect less fiscal and monetary stimulus, we expect inflation to run above the fed's, 2% target well unemployment is expected to fall below the low seen just prior to the pandemic, resulting in the fed rising raising rates.
We expect to begin in March of this year.
We also expect rising mortgage rates will put additional stress on housing affordability for consumers with a continued those slower rise in home prices. These factors along with an expected easing of housing supply constraints lead us to a 2022 full year home price growth forecast of eight two.
Compared to the 19% we saw in 2021 based on Fannie Mae's home price index.
We expect GDP growth of two 8% in 2022 compared to the five 5% growth seen in 2021.
Risk to our outlook include a lack of easing of supply chain disruptions and related inflation continued labor market tightness and the impact of COVID-19 on the U S and abroad. We expect 2022 single family market originations of $3 two trillion relative to $4 five trillion.
<unk> seen in 2021, driven by a large decline in refinances as fewer borrowers will find refinancings beneficial given the expected higher rates and the fact that many borrowers refinanced in 2020 and 2021.
In multifamily were estimating market originations of approximately $475 billion relative to the $450 billion expectation for 2021, which was primarily driven by record level property sales, although we do not anticipate multifamily property sales to <unk>.
A main as elevated in 2022 as they were last year. We still expect continued strong demand driven by a combination of an improving national economy, and pent up demand, particularly from the 20 to 34 year old age group a key demographic for multifamily housing.
Finally national rent growth is expected to moderate from the high growth. We saw in 2021 and vacancy rates are expected to remain below long term historical levels.
Finally, I'd like to point out that we published our financial supplement along with today's 10-K filing which can also be found on our web pages.
With that I'll turn it back to you.
Thanks again for joining US everyone will speak with you again next quarter. Thank.
Thank you ladies and gentlemen that concludes today's call you may disconnect.