Q3 2022 Federal National Mortgage Association Earnings Call

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Good day and welcome to the Fannie Mae third quarter 2022 financial results Conference call. At this time I will now turn it over to your host Pizza Kal Fannie Mae's director of external communications.

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's third quarter 2022 financial results. Please note. This call includes forward looking statements, including statements about Fannie mae's expectations related to economic and housing market conditions and their impact on our business and financial results and the factors that will affect them.

The future performance of the company's book of business, the company's business plans and their impact and the Companys financial results and the factors that will affect that future events may turn out to be very different from these statements. The risk factors and forward looking statements sections in the company's third quarter 2022 Form 10-Q filed today and its 2020.

<unk> Form 10-K filed February 15th of 2020 to describe factors that may lead to different results. A recording of 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.

Now I'd 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 The C. Halle.

Thanks, Pete and thanks to all of you for joining us as we review our third quarter financial results.

We reported $2 4 billion and net income compared to $4 7 billion in the previous quarter.

These earnings resulted in an increase in our net worth to $58 8 billion.

The moment, Chris who will do a deeper dive into the quarterly results and their main drivers, including the macroeconomic conditions impacting housing.

In the third quarter inflationary pressures persisted.

Timber data showed the consumer price index grew eight 2% year over year.

The Federal Reserve continued to increase short term interest rates in its attempt to tame inflation and reiterated our commitment to reducing its balance sheet.

The 10 year Treasury rate increased 82 basis points over the course of the quarter from 3.0 or 1% to 383% and.

And while third quarter GDP increased by two 6% on an annualized basis. We believe this boost is likely temporary in that full year 2022, GDP will be essentially flat.

All of these factors are having a direct impact on the housing finance system and on our business.

30 year fixed rate mortgage rate increased 100 basis points during the quarter from five 7% to six 7% and at October month end was at 7.08%.

Following a period of rapid home price growth in 2000 22021 in the first half of 2022 home prices decline to 0.2% on a national basis in the third quarter.

We estimate that home prices nationally rose 13, 8% year over year in the third quarter of deceleration from the revised 19, 1% year over year growth, we saw in the second quarter.

Now for borrowers these price increases and rising interest rates mean that homes are significantly less affordable than they were a year ago.

Our measure affordability is worse than it was during the 2005 2007 period.

As houses become less affordable demand for housing slows there were around five 4 million, new and existing home sales in the third quarter, a 10% decrease from the prior quarter and a 21% decrease from the third quarter of last year.

Renters also continued to face affordability challenges.

We now expect annual rent growth across all classes to be in the 5% to 6% range in 2022, much of which has already taken place through the third quarter.

The mortgage lenders are seeing a dramatic reduction in origination volume.

We estimate $514 billion in single family mortgage originations in the third quarter, a 24% decrease from the prior quarter and a 54% decrease from the third quarter of last year.

Given rising interest rates home loan application volume has dropped dramatically in the mix of business has changed with significantly fewer refinances been in previous quarters.

As a result, the market has seen notable impacts on lender business models and activities.

Consistent with this lower level of activity Fannie Mae has seem less business volume for single family acquisitions fell by 32% compared to the previous quarter and by 60% compared to the third quarter of 2021.

79% of our acquisition volumes in the third quarter were purchased mortgages the highest share we've seen for at least two decades.

In multifamily our acquisitions declined to $15 9 billion.

Down from $18 7 billion the prior quarter.

Despite these headwinds Fannie Mae provided $134 billion in financing in the third quarter to single family and multifamily markets, which supported 527000 units of housing.

More than 45% of our single family home purchase acquisitions in the third quarter of 2022 were to first time homebuyers.

And over 95% of the multifamily units, we financed in the third quarter of 2022 that we are potentially eligible for housing goals credit were affordable to those earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing.

As these numbers demonstrate we are intently focused on our role as a liquidity provider through all market conditions, including todays.

In order to fulfill that role responsibly for the renters and borrowers reserve and for the broader housing finance system, we need to successfully manage risk on both our acquisitions and our four trillion dollars book of business.

We have in place strong underwriting and loan quality standards, and improved technology, which makes us and the housing finance system better prepared for a potential downturn. So.

Let me call out.

Couple of examples about our single family Guaranty book of business to support this.

Fixed rate loans comprised 99% of our book at the end of the third quarter.

This means that these borrowers will not be subject to payment shocks on their mortgages and a rising interest rate environment.

And looking at the credit quality of our book as of the end of the third quarter Youll see a weighted average mark to market loan to value ratio of 50% and a weighted average credit score at origination of $7 52.

Beyond the credit quality of our book, we also have effective proven tools to support homeowners who experienced financial hardship.

It also helped to manage Fannie Mae's book against defaults.

By effectively managing risk and strengthening the company. We're also strengthening our ability to deliver on our mission, we strongly believe that safety and soundness and mission reinforce each other in this economic environment. The industry is looking to Fannie Mae to be a stable pillar for the market.

And also for our leadership on housing affordability and equity.

Recently, FHFA announced some changes aimed at enhancing affordability and transparency, while also maintaining safety and soundness. These include revisions to our pricing framework and an update to the credit score model, we and others in the industry use as part of the mortgage process.

We will be working with FHFA and the industry to implement these enhancements.

So as we move through this period of economic uncertainty, we are doing so from a position of relative strength, but we also know we can't be complacent.

While we currently expect GDP growth to be essentially flat for 2022, we continue to believe that a modest recession is likely to occur beginning in the first quarter of next year.

We expect mortgage rates to stay elevated through the end of this year and into 2023.

We expect additional home price declines in the fourth quarter of 2022, more specifically, we expect national home price declines of one 9% in the second half of this year and home price declines of one 5% next year.

This is a shift from our expectations last quarter, when we forecasted home price growth in these periods.

We project that elevated mortgage rates and a slowing economy will continue to challenge of affordability and constrained home sales and single family housing starts through the remainder of this year and into next year. We expect single family multifamily housing starts to further decline compared with 2022 due to the economic and.

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So now I'll turn it over to Krista to address our third quarter results in more detail.

Thank you Dave.

Dave mentioned, we recorded $2 $4 billion of net income in the third quarter, a decrease of <unk> 2 billion compared to the second quarter of 2000 2010.

We also recorded seven $2 billion of net revenues this quarter, an 8% decrease compared to the $7 9 billion.

Net revenues in the second quarter.

I'll reflect on two primary drivers of our results for the quarter.

Of which were impacted primarily by the macro economic factors, Dave addressed in his remarks.

First.

Credit related expense.

Credit related expense increased from $251 million in the second quarter <unk> $5 billion in the third quarter of 2020 kit.

Our credit related expense in the third quarter was primarily driven by the decreases in actual and forecasted home prices Dave discussed.

While borrowers has built up strong equity in their homes as seen in the average mark to market loan to value ratio of our book of business.

Home prices increased the likelihood that Lance will default and increase the amount of credit losses on loans that due default.

Which impacts our estimate of losses and increases our provisions for credit losses.

As part of our ongoing analysis of our loss allowance. We also reviewed our provision for credit losses as a result of recent hurricanes.

We expect that some borrowers affected by the Hurricanes will they kind of seriously delinquent on their loans.

It is also possible that the unpaid principal balance of our single family rentals in forbearance.

Increased as a result of borrowers affected by the Hurricanes requesting forbearance.

Despite these factors we concluded that our credit loss models appropriately reflect the potential impact of these recent hurricanes based on our historical loss experience and our current assessment of conditions.

We will continue to monitor the impacts of Hurricanes and and Fiona will be looking at loan performance changes to expectations surrounding insurance coverage and also the amount and availability of federal and state assistance kill affected borrowers.

These factors could change our estimate of credit losses relating to the hurricanes in future periods.

Second net net interest income net interest income declined $684 million from $7 8 billion to $7 $1 billion.

Compared to the second quarter, primarily driven by reduced amortization income.

Amortization income was lower because of the higher interest rate environment resulted in lower refinancing activity and thus <unk>.

<unk> Atlanta prepayments.

I would now like to highlight a few notable trends in our single family business.

As Dave mentioned, 79% of our acquisition volumes in the third quarter were purchase mortgages as.

As the Sheriff home purchase acquisition increased.

Relative increase in the percentage of our single family loan acquisitions with loan to value ratios over 80% from 34% of acquisitions in the second quarter of 2022% to 38% in the third quarter of 2022.

Acquisition FICO scores average 746 in the third quarter of 2020, count flat compared with the second quarter of 2022.

They've provided some statistics on the health of our overall single family Guaranty book of business.

I'll also add that our serious delinquency, our SDK rate decreased 12 basis points to six 9% as of September 32020, compared with eight.

Eight 1% as of June 32022.

This decrease is primarily attributable to loans continuing to successfully exit forbearance, mainly through loan modifications and payment deferrals.

And as we continue to manage the credit risk on our single family book of business Fannie Mae entered into fixed single family credit risk transfer transactions during the quarter referencing $134 billion in unpaid principal balance at the time, we entered the transactions.

Now turning to our multifamily business, we acquired $15 $9 billion of multifamily loans in the third quarter of 2022.

A decrease of $2 $8 billion compared with the second quarter of 2020 Q.

The bulk of these acquisitions provided vital support for both workforce and affordable housing.

As of the end of the third quarter approximately $27 billion remained under our 78 billion dollar multifamily volume cap for 2022.

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

Our multifamily <unk> rate declined to 26 basis points as of September 32022, or 34 basis points as of June 32022, as loans continue to recover from the COVID-19 pandemic.

The multifamily is to curate excluding loans that have received a forbearance since the start of the pandemic with four basis points as of September 32022.

In addition in September we entered into a new CRT deal transferring $339 million of credit risk on a $13 billion referenced Paul.

Acquisitions through our <unk> program.

They are only multifamily CRT deal of the year.

Next I'd like to touch upon our capital position as of September 32022, we had a $258 billion shortfall to the amount of capital needed to be fully capitalized.

$4 billion.

<unk> from June 32022.

This improvement was primarily the result of an increase in our retained earnings and lower capital requirements lower capital requirements for due to single family CRT issuances as well as home price changes that occurred in the second quarter as our capital calculations incorporate home price changes on a one.

One quarter lag basis.

It's important to note that the calculation of available capital under the enterprise regulatory capital framework excludes the stated value of our senior preferred stock and deferred tax assets both of which are included in the calculation of our network.

I will now expand on a few of games remarks on the broader economy and impacts to Fannie Mae.

As a result of higher mortgage interest rates and inflation continuing to weigh on affordability. We further revised downward our forecast for 2022 single family mortgage market originations. We now expect 2022 single family mortgage market originations of $2 three trillion.

Our 49% decrease from 2021 with approximately 70% of activity for the full year of 2022 expected to come from purchase originations.

We currently project a further decline in single family mortgage market originations in 2023 to one seven trillion.

With 77% of that activity coming from purchase originations.

I expect that multifamily mortgage market originations for 2022 will be between $400 billion.

$430 billion down from the $475 billion, we estimated at the start of this year due primarily to rising interest rates and a slowing in multifamily property sales.

Given the amount of credit related expense, we recognized in the first nine months of 2022, we expect significant credit related expense in 2022, compared with significant credit related income in 2021.

We also expect much lower amortization income in 2022, compared with 2021, driven by significantly less refinancing activity in 2020 to get to a higher mortgage interest rate environment. However, we expect this decline in amortization income to be largely offset by increases in net <unk>.

Income from portfolios and increases in base Guaranty fee income.

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

Before I turn it back to Dave I'd like to remind our audience that we provide additional data and commentary on our economic and housing outlook on our web site.

<unk> also published a financial supplement with today's filing that provides additional insights into our business.

With that I'll turn it back to you Dave Okay.

Okay. So before we sign off I would like to mention that this will be my final quarterly earnings call as interim CEO .

We're excited to welcome our new CEO , Brazil, Almodovar, who will be with us beginning in December .

It's been a pleasure to serve Fannie Mae and promote its important mission. These last several months and I look forward to supporting our new CEO as I continue in my role as Fannie Mae's President.

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

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

Okay.