Q2 2023 Federal Home Loan Mortgage Corporation Earnings Call
Good morning, and thank you for joining us for our presentation of Freddie Mac second quarter 2023 financial results.
I'm, Jeff Margaret Stapleton C E O and SVP of external affairs, and corporate Communications, we're joined today by our CEO , Michael Devito and by our CFO , Chris Lown before we begin we'd like to point out that during the call. Mr. Davita, where Mr. <unk> 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.
Description of these factors can be found in the company's quarterly report on 10-Q filed today, you'll find the 10-Q earnings press release and related materials posted on the Investor Relations section of Freddie Mac Dot com. This.
This call is recorded and a replay will soon be available on Freddie Mac dotcom, we ask that the call not be rebroadcast or transcribed with that I'll turn the call over to Freddie Mac CEO Michael Devito.
Good morning, and thank you for joining our second quarter call to review financial results.
Today I'd like to cover three topics.
Ongoing challenges in the housing market, our efforts to tackle those challenges and fulfill our mission and the results we delivered in the second quarter for home buyers and renters.
Let me begin with the housing market, which continues to challenge borrowers and renters two years ago. The average 30 year fixed rate was near historic low at 2.77%.
Today, it's closer to 7%.
Representing the fastest increase in over 40 years.
Nearly six in 10 borrowers who bought or refinanced when rates were low are understandably reluctant to give up that rate.
They may want to move but they are not selling this has consequences throughout the housing market.
First it is exacerbating a supply shortage existing homes for sale are near record lows and June listings were down nearly 41% compared to pre pandemic averages.
It is challenging affordability for many families ryzen.
Rising rates briefly reduced house prices.
Low supply and high demand drove them even higher in many markets. In fact, according to the National Association of Realtors median existing home sale prices in June were the second highest ever recorded in the multifamily space.
Our operators continue to navigate rising mortgage rates.
Contributing to downward pressure on apartment values across the nation.
This is driving up the cost of financing properties, which has slowed multifamily origination volume.
Unfortunately renters continue to bear the brunt of these dynamics as rents reached an all time high in the second quarter.
Now, let me turn to how Freddie Mac is working to tackle the related challenges of housing affordability and availability.
Here's some noteworthy examples of our progress in the second quarter.
Our single family business ramped up loan purchases under our borrow smart access Downpayment assistance program.
More than a dozen lenders already offer borrow smart access to first time homebuyers and disadvantaged neighborhoods of 10 major cities.
Second we introduced the heritage one mortgage product to support homeownership among native Americans Heritage, One provides educational resources counseling and affordable financing options to native Americans looking to purchase on tribal lands.
Third we launched our multifamily workforce housing preservation program.
The program offers favorable financing terms to multifamily owner operators, who agreed to voluntarily keep a percentage of rental units at affordable levels.
This program builds on our tenant advancement commitment or Tac, which supports multifamily owner operators looking to preserve affordable rents provide social services and other resident center housing features.
We financed our first property under Tac in 2018 at plant City, Florida is Walden Lake complex, which features 352 garden style apartments.
To this day rents on half of those units remain affordable to families, earning no more than 80% of the area median income since inception, Freddie Mac has completed 48 cap transactions like Walt and Mike for nearly one 5 billion in.
And helped preserve thousands of affordable units.
Finally, we continue our work to address the national housing supply shortage.
As I previously reported our develop the developer program helps close gaps in knowledge and critical skills for aspiring real estate developers.
To date more than 90 single and multifamily developers have graduated from the program.
More than 80% of them from underrepresented communities.
Now, let's look at Freddie Mac's overall results in.
In the second quarter, we held 372000 families by refinance or rent a home.
This was more than a 40% increase over the first quarter. This includes 102001st time homebuyers, representing more than 51% of the owner occupied homes, we helped finance.
It is a historic high.
Overall, we financed 258000 single family mortgages.
114000 rental units in the second quarter with 55% of the single family mortgages, and 90% of the rental units being affordable to low to moderate income families by.
By remaining focused on our commitment to help families find an affordable place to call home, we earned $2 $9 billion.
And net income.
We grew Freddie Mac's net worth to $42 billion.
The nearly $8 billion, we have added via retained earnings since second quarter 2022 contributes to Freddie Mac's financial stability and our ability to serve our mission.
For more on our financial performance, Here's our CFO , Chris <unk>. Thank you Michael and good morning.
We earned net income of $2 $9 billion this quarter, an increase of $491 million or 20% year over year.
This increase was primarily driven by a credit reserve release in our single family business versus the credit reserve build in the prior year quarter.
Second quarter net revenues were $5 3 billion.
Slight decrease of $65 million year over year.
This decline was driven by lower net interest income, which declined 5% year over year to $4 5 billion.
Primarily driven by lower deferred fee income recognition, resulting from slower prepayments due to higher mortgage rates.
The decline in revenues was partially offset by higher noninterest income of $816 million up 27% year over year, primarily driven by higher guarantee income and investment gains in our multifamily business.
And improvement and observed and forecasted house price appreciation drove a $537 million benefit for credit losses in the quarter versus an expense of $307 million.
The prior year quarter.
In the second quarter of 2020 to the provision for credit losses was driven by portfolio growth and deterioration in forecast economic conditions.
Our total mortgage portfolio at the end of this quarter was $3 four trillion.
A 3% increase year over year.
Turning to our individual business segments. The single family segment reported net income of $2 4 billion for the quarter up 10% year over year.
Single family net interest income of $4 3 billion was down 5% year over year, primarily driven by lower deferred fee income recognition as prepayments slowed down due to higher mortgage interest rates.
Mortgage interest rates at the end of this quarter were $6 seven 1% up 100 basis points from the prior year quarter, and almost 40 basis points from the last quarter.
Noninterest income for single family was $65 million this quarter down $271 million from the prior year quarter.
This decline was primarily driven by changes in market spreads on mortgage commitments.
Our provision for single family credit losses, this quarter was a benefit of $638 million.
Primarily driven by improvements in observed in forecast house price appreciation.
In the prior year quarter, we had a provision expense of $298 million.
Which is primarily driven by portfolio growth and deterioration and forecasted economic conditions.
House prices increased by two 1% this quarter and our forecast assumes an increase of <unk>, 8% over the next 12 months and <unk>, 9% over the subsequent 12 months.
The single family allowance for credit losses coverage ratio at the end of this quarter was 24 basis points up from 17 basis points a year earlier.
The single family serious delinquency rate continued to decline to 56 basis points at the end of the second quarter down 20 basis points from <unk> 2022, and six basis points from <unk> 2023.
In the second quarter, we helped approximately 20000 families remain in their homes to loan workouts.
Our loan workouts have continues to decline as the seriously delinquent loan population has declined.
Our single family mortgage portfolio increased 3% year over year to <unk> three trillion at the end of this quarter.
Credit characteristics of our single family portfolio remained strong with a weighted average current loan to value ratio of 54% and the weighted average current credit score of 756.
At the end of the quarter, 62% of our single family portfolio had some form of credit enhancement.
New business activity picked up versus the first quarter of 2023 and totaled $83 billion this quarter.
An increase of $24 billion or 41% versus last quarter.
However.
Year over year, new business activity declined $55 billion or 40% as refinance activity has declined substantially due to increased mortgage interest rates.
Home purchase volume made up 88% of our total new business activity this quarter compared to 62% in <unk> 2022.
The average guaranty fee rate charged on new business was 57 basis points this quarter.
Moving on to multifamily the segment reported net income of $563 million.
Our $278 million from the prior year quarter.
This increase was primarily driven by higher noninterest income, which was partially offset by a higher provision for credit losses. This period.
Noninterest income was $751 million up $442 million year over year, driven by higher guarantee income and higher investment gains.
Guarantee income increased primarily due to lower fair value losses on guarantee assets as a result of a smaller interest rate increases.
Net investment gains increased primarily due to fair value gains from interest rate risk management activities specific to our guarantee assets an index lock agreements.
The provision for credit losses in multifamily this quarter was $101 million driven by a credit reserve build due to deterioration in forecasted multifamily market conditions and current loan performance.
The multifamily allowance for credit losses coverage ratio at the end of this quarter was 50 basis points from 11 basis points a year earlier.
The multifamily delinquency rate was 21 basis points at the end of the quarter up from 13 basis points last quarter and seven basis points at the end of June 2022.
This change was primarily driven by an increase in delinquent loans in our seniors housing portfolio.
95% of these delinquent loans have credit enhancement coverage.
Our multifamily new business activity was $13 billion for the second quarter down 13% from a year ago as higher interest rates have reduced demand for multifamily mortgage financing on a multifamily mortgage portfolio increased by 3% year over year to 427 billion.
Of which 94% was covered by credit enhancements.
On the capital front, our net worth increased to $42 billion at the end of the quarter, representing a 23% increase year over year with that I will turn it back over to Michael.
Thank you Chris.
Quarter saw single family home prices stabilize influenced by strong demand higher residential mortgage rates and limited homes for sale Brent.
<unk> continue to be cost burden as rents rose in the face of softening multifamily property prices Freddie Mac remains focused on its mission and delivered a solid quarter, helping 372000 families by refinance or rent a home.
The majority of them affordable to low or moderate income borrowers and renters.
Our commitment to serving our mission remains our top priority.
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Good morning, and thank you for joining us for our presentation of Freddie Mac's second quarter 2023 financial results.
I'm, Jeff Markowitz, Deputy CEO , and SVP of external affairs, and corporate Communications, we're joined today by our CEO , Michael Devito and by our CFO , Chris Lown before we begin we'd like to point out that during the call. Mr. Davita with Mr. <unk> may make forward looking statements based on assumptions about the company's key business drivers and other factors.
<unk> and these factors could cause the company's actual results to materially vary from its expectations.
Description of these factors can be found in the company's quarterly report on 10-Q filed today, you'll find the 10-Q earnings press release and related materials posted on the Investor Relations section of Freddie Mac Dot com.
This call is recorded and a replay will soon be available on Freddie Mac Dot com, we ask that the call not be rebroadcast or transcribed with that I'll turn the call over to Freddie Mac CEO Michael Devito.
Good morning, and thank you for joining our second quarter call to review financial results.
Today I'd like to cover three topics ongoing challenges in the housing market.
Efforts to tackle those challenges and fulfill our mission and the results we delivered in the second quarter for home buyers and renters. Let me begin with the housing market, which continues to challenge borrowers and renters two years ago. The average 30 year fixed rate was near historic low at.
2.77%.
It's closer to 7% representing the fastest increase in over 40 years and.
And nearly six in 10 borrowers who bought or refinanced when rates were low are understandably reluctant to give up that rate.
They may want to move but they are not selling.
This has consequences throughout the housing market.
First it is exacerbating the supply shortage existing homes for sale are near record lows in June listings were down nearly 41% compared to pre pandemic averages.
It is challenging affordability for many families.
<unk> rates briefly reduced house prices, but low supply and high demand drove them even higher in many markets. In fact, according to the National Association of Realtors median existing home sale prices in June were the second highest ever recorded in the multifamily space owner.
Operators continue to navigate rising mortgage rates that are contributing to downward pressure on apartment values across the nation.
This is driving up the cost of financing properties.
Which has slowed multifamily origination volume.
Unfortunately renters continue to bear the brunt of these dynamics as rents reached an all time high in the second quarter.
Now, let me turn to how Freddie Mac is working to tackle the related challenges of housing affordability and availability.
Here's some noteworthy examples of our progress in the second quarter.
First our single family business ramped up long purchases under our borrow smart access Downpayment assistance program.
More than a dozen lenders already offer borrow smart access to first time homebuyers and disadvantaged neighborhoods of 10 major cities.
We introduced the heritage one mortgage product to support homeownership among native Americans Heritage, One provides educational resources counseling and affordable financing options to native Americans looking to purchase on tribal lands.
Third we launched our multifamily workforce housing preservation program.
Program offers favorable financing terms to multifamily owner operators, who agreed to voluntarily keep a percentage of rental units at affordable levels.
This program builds on our tenant advancement commitment or Tac, which supports multifamily owner operators looking to preserve affordable rents.
<unk> social services and other resident center housing features.
We financed our first property under Tac in 2018 at plant City, Florida is Walden Lake complex, which features 352 garden style apartments.
This day rents on half of those units remain affordable to families, earning no more than 80% of the area median income since inception, Freddie Mac has completed 48 cap transactions like Walden Lake for nearly one $5 billion and help preserve thousands of affordable units.
Finally, we continue our work to address the national housing supply shortage as I previously reported our developed the developer program helps close gaps in knowledge and critical skills for aspiring real estate developers to.
To date more than 90 single and multifamily developers have graduated from the program.
More than 80% of them from underrepresented communities.
Now, let's look at Freddie Mac's overall results.
In the second quarter, we held 372000 families by refinance or rent a home.
More than a 40% increase over the first quarter. This includes a 102001st time homebuyers, representing more than 51% of the owner occupied homes, we helped to finance it.
It is a historic high.
Overall, we financed 258000 single family mortgages and 114000 rental units in the second quarter with 55% of the single family mortgages and 90% of the rental units being affordable to low to moderate income families.
By remaining focused on our commitment to help families find an affordable place to call home, we earned $2 9 billion.
Net income and we grew Freddie Mac's net worth to $42 billion.
Nearly $8 billion, we have added via retained earnings since second quarter 2022 contributes to Freddie Mac's financial stability and our ability to serve our mission.
For more on our financial performance, Here's our CFO , Chris loud, Thank you Michael and good morning.
We earned net income of $2 $9 billion this quarter, an increase of $491 million or 20% year over year. This.
This increase was primarily driven by a credit reserve release in our single family business versus the credit reserve build in the prior year quarter.
Second quarter net revenues were $5 3 billion.
A slight decrease of $65 million year over year.
This decline was driven by lower net interest income, which declined 5% year over year to $4 5 billion.
Primarily driven by lower deferred fee income recognition, resulting from slower prepayments due to higher mortgage rates.
The decline in revenues was partially offset by higher noninterest income of $816 million up 27% year over year, primarily driven by higher guarantee income and investment gains in our multifamily business.
And improvement and observed and forecast that house price appreciation drove a $537 million benefit for credit losses in the quarter versus an expense of $307 million in the.
The prior year quarter.
In the second quarter of 2020 to the provision for credit losses was driven by portfolio growth and deterioration in forecast economic conditions.
Our total mortgage portfolio at the end of this quarter was $3 four trillion.
A 3% increase year over year.
Turning to our individual business segments. The single family segment reported net income of $2 4 billion for the quarter up 10% year over year.
Single family net interest income of $4 3 billion was down 5% year over year, primarily driven by lower deferred fee income recognition as prepayments slowed down due to higher mortgage interest rates.
Mortgage interest rates at the end of this quarter were $6 seven 1% up 100 basis points from the prior year quarter, and almost 40 basis points from the last quarter.
Noninterest income for single family was $65 million this quarter down $271 million from the prior year quarter.
This decline was primarily driven by changes in market spreads on mortgage commitments.
Our provision for single family credit losses, this quarter was a benefit of $638 million.
Primarily driven by improvements in observed in forecast house price appreciation.
In the prior year quarter, we had a provision expense of $298 million, which was primarily driven by portfolio growth and deterioration and forecasted economic conditions.
House prices increased by two 1% this quarter and our forecast assumes an increase of <unk>, 8% over the next 12 months, 0.9% over the subsequent 12 months.
The single family allowance for credit losses coverage ratio at the end of this quarter was 24 basis points up from 17 basis points a year earlier.
The single family serious delinquency rate continued to decline to 56 basis points at the end of the second quarter down 20 basis points from <unk> 2022, and six basis points from <unk> 2023.
In the second quarter, we helped approximately 20000 families remain in their homes to loan workouts.
Our loan workouts have continues to decline as the seriously delinquent loan population has declined.
Our single family mortgage portfolio increased 3% year over year to <unk> three trillion dollars at the end of this quarter.
Credit characteristics of our single family portfolio remains strong with a weighted average current loan to value ratio of 54% and the weighted average current credit score of 756.
At the end of the quarter, 62% of our single family portfolio had some form of credit enhancement.
New business activity picked up versus the first quarter of 2023 and totaled $83 billion this quarter.
An increase of $24 billion or 41% versus last quarter. However.
However.
Year over year, new business activity declined $55 billion or 40% as refinance activity declined substantially due to increased mortgage interest rates.
Home purchase volume made up 88% of our total new business activity this quarter compared to 62% in <unk> 2022.
The average guaranty fee rate charged on new business was 57 basis points this quarter.
Moving on to multifamily the segment reported net income of $563 million.
$278 million from the prior year quarter.
This increase was primarily driven by higher noninterest income, which was partially offset by a higher provision for credit losses. This period.
Noninterest income was $751 million up $442 million year over year, driven by higher guarantee income and higher investment gains.
Guarantee income increased primarily due to lower fair value losses on guarantee assets as a result of smaller interest rate increases.
Net investment gains increased primarily due to fair value gains from interest rate risk management activities specific to our guarantee assets an index lock agreements.
The provision for credit losses in multifamily this quarter was $101 million driven by a credit reserve build due to deterioration in forecasted multifamily market conditions and current loan performance.
The multifamily allowance for credit losses coverage ratio at the end of this quarter was 50 basis points from 11 basis points a year earlier.
The multifamily delinquency rate was 21 basis points at the end of the quarter up from 13 basis points last quarter and seven basis points at the end of June 2022.
This change was primarily driven by an increase in delinquent loans in our seniors housing portfolio.
95% of these delinquent loans have credit enhancement coverage.
Our multifamily new business activity was $13 billion for the second quarter down 13% from a year ago as higher interest rates have reduced demand for multifamily mortgage financing and multifamily mortgage portfolio increased by 3% year over year to 427 billion.
Of which 94% was covered by credit enhancements.
On the capital front, our net worth increased to $42 billion at the end of the quarter, representing a 23% increase year over year with that I will turn it back over to Michael.
Thank you Chris.
<unk> quarter saw single family home prices stabilize influenced by strong demand higher residential mortgage rates and limited homes for sale Brent.
<unk> continue to be cost burden as rents rose in the face of softening multifamily property prices Freddie Mac remains focused on its mission and delivered a solid quarter, helping 372000 families by refinance or rent a home.
The majority of them affordable to low or moderate income borrowers and renters.
Our commitment to serving our mission remains our top priority.