Q1 2022 Federal National Mortgage Association Earnings Call

Good morning, and welcome to the Fannie Mae first quarter 2022 financial results conference call.

At this time I will now turn it over to your host Pete per cow, Fannie Mae's director of external communications.

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's first quarter 2022 financial results. Please note. This call may include forward looking statements, including statements about Fannie mae's expectations related to economic and housing market conditions, the impact of loan performance and the factors that will affect the company.

These business plans and their impact on the Companys financial results future events may turn out to be very different from these statements the risk factors and forward looking statements sections in the company's first quarter 2022 Form 10-Q filed today and in its 2021 Form 10-K filed February 15th described.

Factors that may lead to different results.

We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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 President and interim Chief Executive Officer, David C Benson and Fannie Mae Chief Financial Officer, Chris is C. Halle.

Welcome and thank you for joining us as we share our 2022 first quarter actual results.

I'll provide opening comments and then our chief Financial Officer, Sally will cover our first quarter results in more depth.

First let me just say that I'm very pleased to join this call for the first time in my role if any based president and interim CEO .

I've been with the company for almost 20 years, serving a wide range of physicians.

2018, I've been president, leading our single family and multifamily businesses as well as our corporate functions.

Prior to that I served as our Chief financial Officer head of our capital markets team for that.

That is Roger.

Across all of these roles I've always been impressed by the talent.

Our ability to manage through change.

I want to thank our now former CEO Hugh Frater.

Outstanding leadership and service to the company.

You left the company stronger than when he arrived.

A champion for our housing mission and challenged us to always put the needs of renters to homeowners.

I believe our mission is more important than ever given today's housing market and the conditions that prevailed in the first quarter of 2022.

First rushes invasion of Ukraine injected additional disruptions into the world economy and financial markets.

<unk> continues to do so.

Here in the United States GDP contracted annual pace of one 4% in the first quarter.

Our positive growth of six 9%.

Fourth quarter of 2021.

At the same time inflation rose to the highest rate 40 years.

That will reserve raised interest rates for the first time since 2018.

Mortgage rates increased by 156 percentage points during the first quarter the fastest to increase.

84, and recently, we've seen rates over 5%.

At the same time oil prices continued to rise growing by four 6% first quarter of 2022.

This follows 19, 1% growth in 2021 and 10, 4% in 2020.

For comparison, the average annual growth rate from 2015 through 2019 was 5%.

In fact, we believe interest rate increases and consumers' expectations for why it's down the road pull demand forward, but Gaslog limited supply.

Putting even more upward pressure on prices.

In addition, the rise in mortgage rates will likely constrain supply even further.

Some existing homeowners, we want them to sell their oil in Shockwave.

With our higher price debt and a more extensive mortgage.

Together these factors put increased pressure on affordability for both renters and homebuyers.

Unfortunately for homebuyers, especially those buyers looking for their first of all we don't see any near term really supportive, though we squeeze.

Against this backdrop Fannie Mae continues to perform solidly in the first quarter.

We reported $4 4 billion and net income for the quarter and our network rose to $51 8 billion as of March 31, which bolsters, our financial strength by improving our ability to absorb losses in any given quarter overall, we supply 250.

$5 billion of liquidity to the single family and multifamily mortgage markets in the first quarter.

This supported $104 billion of single family home purchase acquisition of which nearly 50% with first time homebuyers.

We also financed 136000 units of rental housing a significant majority of which were affordable to families, earning at or below 120% severity.

More to come.

Now looking ahead, we expect slower economic growth this year, and we along with others be increasing.

Although modest recession in 2023.

Believe this will have an impact on housing over the next two years, we expect loan sale home prices and mortgage origination volumes the cool.

But fortunately, we do not expect the housing downturn, the severity or duration that we saw in 2008.

There are important differences.

Mortgage credit quality is stronger.

Residential real estate and the financial system in general is less leverage and mortgage servicers are much better equipped to help struggling homeowners.

We also believe that a mild downturn will bring housing demand more in alignment with supply.

Slow house price depreciation and modestly improve affordability.

Of course, our outlook is affected by factors that are subject to a fair amount of uncertainty.

Including the pace of fed tightening continuing inflation supply chain and labor challenges Covid and the impact of Russia's war against Ukraine.

As we move through 2022, Fannie Mae will continue focusing on a few critical priorities.

We will focus on continuing to be a steady reliable source of affordable sustainable mortgage financing for renters and homeowners.

We will focus on managing our risks carefully.

We will focus on continuing to develop and diversify our talent at all levels of the organization.

And we will continue to take the ambition first approach knocking down barriers for retrofits at homeowners.

We agree with FHFA acting director, Tom said that safety is Dallas and access and affordability can and must complement each other and we.

We're putting this into practice.

For example, we recently announced a new pricing incentives for multifamily property owners, who would accept but housing choice vouchers.

Vouchers are a vital source of housing support with very low income families seniors historically underserved populations and people with disabilities.

Our goal is to make the rental housing market more inclusive and equitable by expanding the availability of multifamily debt, except these out years.

Now another example.

We continue to drive for greater lender adoption of innovation, we introduced last year that makes it easier to considered timely rental payments as part of the underwriting decision as a retrofit it to become a first time homebuyer.

And a third example, we recently announced that we will require mortgage servicers, we suspend foreclosure activities that they are notified that a borrower has applied for assistance under Treasury homeowner assistance slide apartment is designed to help struggling homeowners.

These are just a few examples of how we're putting renters into homeowners first expect to see more in the months ahead.

Now with that let me hand off to Cressa.

Thank you Dave.

First quarter 2022 financial results remain strong.

As Dave mentioned, there are quite a $4 billion of net income in the first quarter. This is compared to $5 $2 billion in the fourth quarter of 2021 and $5 billion in the first quarter of 2020 Lang.

Contributors to the changes in our results in the first quarter at this year compared to the fourth quarter of 2021.

Related expense investment losses, and fair value gains.

<unk> $201 million of credit related expense in the first quarter, a shift from $912 million of credit related income in the fourth quarter of 2021.

The market experienced four 6% home price growth in the first quarter. This did not drive significant credit related income as our allowance previously took into account expected home price growth in 2022.

Rather we recorded a credit related expense driven by a net increase in our allowance for previously modified loans that we account for as troubled debt restructurings or <unk>. These loans are sensitive to interest rate changes.

As rates rose during the quarter the allowance on this legacy population of modified loans increased.

This was partially offset by some lines in this population receiving loss mitigation arrangements during the quarter.

As a result of our adoption of new accounting guidance discontinuing PBR accounting.

Move to these loans from the legacy <unk> population, which reduced our allowance on them.

We expect changes in actual and projected interest rates will have less impact on our credit related income or expense in future periods as our population of lens accounted for STR decreases.

We also recorded investment losses of $102 million in the first quarter of this year relative to investment gains of $418 million in the fourth quarter of last year.

The shift from investment gains to losses was driven primarily by the absence of loan sales in the first quarter of 2022.

These losses were partially offset by fair value gains of $480 million compared to fair value losses of $166 million the previous quarter.

Fair value gains in the first quarter of 2022 were driven primarily by increases in the fair value of commitments to sell mortgage related securities.

As prices decreased during the commitment period.

As well as gains in the fair value of long term debt of consolidated trusts held at fair value.

Due to rising interest rates and widening of the secondary spreads.

Fair value gains were partially offset by declines in the fair value of fixed rate trading securities.

Fair value hedge accounting, which the company implemented in January 2021.

<unk> to be an effective tool in addressing volatility of interest rate changes.

In addition, net interest income was $7 4 billion in the first quarter of 2022.

<unk> slightly from the fourth quarter of 2021.

As expected we saw reduced amortization income driven by a decrease in prepayment volumes due to rising interest rates.

The rising rate environment also drove lower single family acquisition volumes quarter over quarter and a continued increase in the percentage of purchase loans as fewer people refinanced.

Acquired $239 billion of single family loans in the first quarter of 2022 with purchased acquisitions at 43% compared to $285 billion of.

A single family loans in the fourth quarter of 2021 with purchase acquisitions at 38%.

As the share of home purchase acquisitions increased we saw a natural increase in the percentage of our single family loan acquisitions with loan to value ratios over 80% to 24% in the first quarter of 2022 from 21% in the fourth quarter of 2012.

One we also saw a decline in acquisition FICO scores, which averaged $7 48 in the first quarter of 2022 compared with $7 51 in the fourth quarter of 2021 as a result average charged guaranty fees on acquisitions net of TTC.

<unk> increased one eight basis points to $48 nine basis points.

As Dave mentioned, we along with others forecast a modest recession to occur after this year most likely in the second half of 2023.

While we expect a period of modest economic contraction to impact the housing market mortgage credit quality is strong.

As of March 31.

And our single family book of business had an average FICO score of 753, and a weighted average mark to market loan to value ratio of 53%.

Our single family serious delinquency or S. DQ rate continued to decline and was one 1% as of the ended the first quarter in.

In addition, Fannie Mae entered into six credit risk transfer transactions during the quarter referencing $218 billion in unpaid principal balance at the time, we entered the transactions.

We acquired $16 billion of multifamily loans in Q1, leaving $62 billion remaining under our 78 billion dollar multifamily volume cap for 2022.

The credit profile of our multifamily book of business also remains strong with a weighted average original loan to value ratio of 65% and a weighted average debt service coverage ratio of two one.

Our multifamily as DQ rate declined from four 2% as of December 31, 2021 to three 8% as of March 31, 2022 now.

Now as Dave noted our net worth increased in the first quarter of 2022% to 51 $8 billion increases in our net worth are helpful. Because they improve our ability to absorb losses in any given quarter.

By contrast, we had an $82 billion deficit and available adjusted total capital as of the end of the first quarter.

It is important to note that the calculation of this capital measurement under the enterprise regulatory capital framework, which we began reporting in our 10-Q. This quarter excludes the stated value of our senior preferred stock and deferred tax assets.

Of which are included in the calculation of our network.

Because of this deficit as of March 31, 2022, we added $272 billion shortfall to the amount of capital needed to be fully capitalized.

I'd like to turn for a moment to our outlook for mortgage originations in 2022, and some thoughts on net income we have revised downward our 2022 single family market originations to $2 eight trillion.

With 68% of that activity coming from purchase originations.

We continue to expect multifamily market originations of $475 billion, driven by strong rental demand and the elevated level of construction completion is expected this year, which we anticipate will result in a need for multifamily borrowers to finance completed properties.

To pay off their construction loans.

Robust competition for multifamily financing is anticipated throughout 2022, which in combination with higher interest rates and wider MBS spreads may put pressure on our business volumes and guarantee fees.

Finally, we expect lower amortization income in 2022, compared with 2021, driven by reduced refinancing activity. In addition, we expect a shift from significant credit related income in 2021 to modest credit related expense in 2022.

We expect those factors to result in lower net income in 2022 compared with 2021.

As a reminder, we published our financial supplement along with todays filing which provides useful insights into our multifamily and single family books of business.

With that I will.

I'll turn it back over to you Dave.

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

Thank you ladies and gentlemen that concludes today's call you may disconnect.

Yeah.

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