Q3 2023 Federal National Mortgage Association Earnings Call
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Good day and welcome to the Fannie Mae third quarter 2023 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 third quarter 2023 financial results. Please note. This call includes forward looking statements, including statements about Fannie mae's expectations related to economic and housing market conditions. The future performance of the Companys book of business and the company's business.
<unk> and their impact future events may turn out to be very different from these statements. The forward looking statements section in the company's third quarter 2023 Form 10-Q filed today and the risk factors and forward looking statements sections in the company's 2020 to Form 10-K filed on February 14th 2020.
Three describe factors that may lead to different results.
According to this call may be posted on the Companys website, we ask that you do not record this call for public broadcast and that you do not publish any full transcript.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, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Christopher C. Halle.
Welcome and thank you for joining us today I'll touch briefly on the macro environment before reviewing our quarters financial and mission performance after that our Chief Financial Officer, Chris of Harry will discuss our quarterly results and economic outlook in more detail.
Economic data throughout the year has been stronger than expected, including in the third quarter with GDP growing at a four 9% annualized pace, while wage growth moderate as job growth remains robust inflation remains nearly two percentage points higher than the federal reserve's target rate and the 10 year Treasury ended the quarter.
Operator: Good day and welcome to the Fannie Mae Third Quarter 2023 Financial Results Conference Call.
Pete Bakel: At this time, I will now turn it over to your host, Pete Bakel, 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 2023 Financial Results. Please note this call includes four looking statements, including statements about Fannie Mae's expectations related to economic and housing market conditions, the future performance of the company's book of business, and the company's business plans, and their impact.
Pete Bakel: Future events may turn out to be very different from these statements. The forward-looking statements section in the company's Third Quarter 2023 form 10Q filed today, and the risk factors in forward-looking statements sections in the company's 2022 form 10K filed on February 14, 2023 describe factors that may lead to different results. A recording of this call may be posted on the company's website.
At four 6% and continued to rise.
That is why in housing this year continues to remain a tale of two markets.
Good market for homeowners, who locked in low mortgage rates and have more equity in their homes due to rising home prices.
For homebuyers, especially consumers looking to buy their first home or those of modest means it's a tough market. One that is burdened by high home prices limited inventory and higher mortgage rates.
In fact for the third straight month median existing home prices were up from a year ago.
And the 30 year fixed rate mortgage rate was most recently as high as seven 8%.
Pete Bakel: We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.
Because of these factors in September existing home sales fell mortgage origination activity continued to be slow and consumer sentiment to bias home was the lowest it has been in the history of Fannie Mae's home purchase sentiment index.
Priscilla Almodovar: I'd now like to turn the call over to Fannie Mae, Chief Executive Officer, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Chryssa C. Halley. Welcome, and thank you for joining us today. I'll touch briefly on the macro environment before reviewing our quarters' financial and mission performance. After that, our Chief Financial Officer, Chryssa Halley, will discuss our quarterly results in economic outlook in more details. Economic data throughout the year has been stronger than expected, including in the Third Quarter with GDP going at a 4.9% annualized pace.
In the case of multifamily higher interest rates and general market uncertainty has contributed to a decline in overall market activity and declining property values.
And while the pace of growth has slowed year over year rents are still at all time highs.
This is yet another example of the affordability challenges that consumers face.
Priscilla Almodovar: While wage growth moderated, job growth remains robust, inflation remains nearly 2% points higher than the Federal Reserve's target rate, and the 10-year Treasury ended the quarter at 4.6% and continued to rise. That is why in housing, this year continues to remain a tale of two markets. It's a good market for homeowners who've locked in low mortgage rates and have more equity in their homes due to rising home prices, yet for home buyers, especially consumers looking to buy their first home, or those of modest means, if they tough market, one that is burdened by high home prices, limited inventory, and high mortgage rates.
Despite this challenging macroeconomic backdrop, we remain committed to working with lenders to support renters and homeowners, while effectively managing risks to our business.
Turning to the quarter, we reported $4 7 billion and net income.
Contributing to our net income was a credit reserve release, reflecting higher actual and forecasted single family home prices.
As a result, we continue to build our net worth through retained earnings which increased to just under $74 billion as of the end of September.
This increase further bolstered our financial stability and enable us to continue being a reliable source of mortgage credit.
Priscilla Almodovar: In fact, for the third straight month, median existing home prices were up from a year ago, and the 30-year fixed rate mortgage rate was most recently as high as 7.8%. Because of these factors in September, existing home sales fell, mortgage origination activity continued to be slow, and consumer sentiment to buy a home was the lowest it has been in the history of many-made home purchase sentiment index. In the case of multi-family, higher interest rates and general market uncertainty have contributed to a decline in overall market activity and declining property values.
In fact, this quarter, we provided $106 billion and market liquidity.
This helped 428000 households by refinance or rent a home.
This included 159000 multifamily rental units a significant majority of which were affordable to households, earning at or below a 120% of area median income.
We also helped over 106001st time homebuyers to purchase a home.
Provided liquidity is only one way Fannie Mae serves the market and works to make it better for everyone.
Priscilla Almodovar: And while the pace of growth has slowed year over year, rents are still at all time highs. This is yet another example of the affordability challenges that consumers face. Despite this challenging macroeconomic backdrop, we remained committed to working with lenders, to support renters and homeowners while effectively managing risks to our business. Turning to the quarter, we reported $4.7 billion in net income, contributing to our net income was a credit reserve release reflecting higher actual and forecasted single family home prices.
Let me share a few examples.
First we provided educational resources to help renters and homebuyers address challenges they might face on your housing journey.
This quarter for example, we launched a Spanish language credit course strategies for healthy credit on home view, our free online education tools.
We also recently refreshed our flood awareness survey that measures consumers' awareness and attitudes towards flood risk and insurance and.
We redesigned our flood related content on Fannie Mae Dot com.
Priscilla Almodovar: As a result, we continued to build our net worth through retained earnings, which increased to just under $74 billion as of the end of September. This increased further bolstered our financial stability and enabled us to continue being a reliable source of mortgage credit. In fact, this quarter, we provided $106 billion in market liquidity. This helped 428,000 households buy, refinance, or rent a home. This included 159,000 multi-family rental units, a significant majority of which were affordable to households earning at or below 120% of area median income.
Second we continue to work with our partners to increase the creation and preservation of affordable rental housing.
Like we do with our multifamily sponsor initiated affordability program.
Which incentivizes multifamily property owners to voluntarily established income limits and set aside at least 20% of units as affordable to lenders, earning up to 80% of area median income for the life of loan.
Earlier this month, we built upon this program by launching our multifamily sponsored dedicated workforce housing initiatives.
Which is aimed at conventional workforce housing providers.
This program provides a pricing incentive to owners willing for the life of the loan to keep <unk> on at least 20% of units.
Priscilla Almodovar: We also helped over 106,000 first-time home buyers to purchase a home. Providing liquidity is only one way Fannie Mae serves the market and works to make it better for everyone. Let me share a few examples. First, we provided educational resources to help renters and home buyers address challenges they might face on their housing journey. This quarter, for example, we launched a Spanish language credit course strategies for healthy credit on home views are free online education tools.
At level affordable to renters, earning up to 80% of area median income and up to 120% in certain high cost areas.
And a final example of how we aimed to help make the market serve everyone is the work we continue to do to identify new ways to attract capital to underserved markets.
Like what we are dealing in single family, where we provide mortgage backed security disclosures that gives investors insights into our mission activity.
This information allows MBS investors to allocate their capital towards populations, who have traditionally face barriers to housing access.
Priscilla Almodovar: We also recently refreshed our flood awareness survey that measures consumers awareness and attitudes towards flood risk and insurance, and we redesigned our flood related content on Fannie Mae dot com. Second, we continued to work with our partners to increase the creation and preservation of affordable rental housing, like we do with our multi-family sponsor initiated affordability program, which incentivizes multi-family property owners to voluntarily establish income limits and set aside at least 20% of units as affordable to renters earning up to 80% of area median income for the lives of alone.
While today's economic and geopolitical environment are uncertain Fannie mae's priorities are clear.
We're focused on being a reliable source of liquidity and stability to the U S housing finance system. We are focused on making the housing market work better for everyone by advancing equitable and sustainable housing opportunities and we are focused on strong risk management and ensuring we are financially secure so that we can do.
<unk> on our mission.
I want to thank our dedicated teams are effectively managing risks, while working with our partners across the housing ecosystem to support U S renters and homeowners.
Priscilla Almodovar: Earlier this month, we built upon this program by launching our multi-family sponsor dedicated workforce house initiatives, which is aimed at conventional workforce housing providers. This program provides a pricing incentive to owners willing for the life of alone to keep friends on at least 20% of units at level affordable to renters earning up to 80% of area median income and up to 120% in certain high cost areas. And a final example of how we aim to help make the market serve everyone is the work we continue to do to identify new ways to attract capital to underserved markets, like what we are doing in single families where we provide mortgage back security, to give investors insights into our mission activities.
Now I'll turn it over to Chris to discuss our third quarter financial results.
Thank you Priscilla and good morning, everyone.
As <unk> mentioned, we reported $4 $7 billion in net income in the third quarter are roughly $300 million decrease compared to the second quarter of this year.
Our third quarter revenues remained strong at seven $3 billion, we recorded $7 $2 billion of net interest income. Thanks to strong guarantee fees. This is $185 million higher than last quarter's net interest income.
We saw credit benefit this quarter of $652 million driven primarily by a release in reserves due to increases in actual and forecasted single family home prices.
Priscilla Almodovar: This information allows MBS investors to allocate their capital towards populations who have traditionally faced barriers to housing access. While today's economic and geopolitical environment are uncertain, Fannie Mae's priorities are clear. We're focused on being a reliable source of liquidity and stability to the U.S, housing finance system. We are focused on making the housing market work better for everyone by advancing equitable and sustainable housing opportunities. And we are focused on strong risk management and ensuring we are financially secure to that we can deliver on our mission. I want to thank our dedicated teams who are effectively managing risks while working with our partners across the housing ecosystem to support U.S, renters and homeowners.
This was partially offset by write offs from loan re designation due to our intention to sell a portion of the nonperforming and re performing loans and our retained mortgage portfolio.
This is compared to a $1 3 billion dollar credit benefit and the previous quarter that was also driven primarily by home price increases.
Increases in interest rates drove around $800 million in fair value gains nearly double the fair value gains in the previous quarter. In addition, we recorded a $491 million litigation expense related to a jury verdict and an award of prejudgment interest for Fannie Mae.
Preferred shareholders in the third quarter.
Chryssa Halley: Now, I'll turn it over to Chryssa to discuss our third quarter financial results. Thank you, Priscilla, and good morning, everyone. As Priscilla mentioned, we reported $4.7 billion in that income in the third quarter.
Turning to a few single family business highlights, we acquired $89 billion and single family loans in the third quarter, which is flat compared to the second quarter given the interest rate environment. The share of our single family acquisitions that were purchases climbed to 88% the highest level we've seen.
Chryssa Halley: A roughly $300 million decrease compared to the second quarter of this year. Our third quarter revenues remain strong at $7.3 billion. We recorded $7.2 billion of net interest income thanks to strong guarantee fees. This is $185 million higher than last quarter's net interest income. We saw a credit benefit this quarter of $652 million driven primarily by a release in reserves due to increases in actual and forecasted single-family home prices. This was partially offset by write-offs from loan redesignations due to our intention to sell a portion of the non-performing and re-performing loans and our retained mortgage portfolio.
For over two decades.
Our overall single family book of business remains strong with a weighted average mark to market loan to value ratio of 51% and weighted average credit score at origination of 753 or.
Our single family serious delinquency rate remained near historically low levels and as of September 30th stood at 54 basis points due.
Due to current economic conditions, including low unemployment and thanks to our underwriting standards and effective loan workout options for distressed borrowers.
As projected a weakening economy may impact the credit performance of loans in our single family guarantee business, which could lead to an increase in our single family serious delinquency rate.
Chryssa Halley: This is compared to a $1.3 billion credit benefit in the previous quarter that was also driven primarily by home price increases. Increases in interest rates drove around $800 million in fair value gains, nearly double the fair value gains in the previous quarter.
In the third quarter, we transferred a portion of the credit risk on $49 billion of mortgages through our single family credit risk transfer programs.
Now in multifamily, we acquired $16 $4 billion of multifamily loans in the third quarter, which brings our year to date acquisitions to $42 million compared to $51 billion at this time last year.
Chryssa Halley: In addition, we recorded a $491 million litigation expense related to a jury verdict and an award of pre-judgment interest for Fannie Mae preferred shareholders in the third quarter. Turning to a few single-family business highlights, we acquired $89 billion in single-family loans in the third quarter, which is flat compared to the second quarter. Given the interest rate environment, the share of our single-family acquisitions that were purchases climbed to 88%, the highest level we've seen for over two decades.
This downward trend is consistent with 2023, lower overall market activity driven by the uncertain market environment and higher interest rates.
Despite declining property values in the multifamily market the multifamily loans, we acquired year to date have a weighted average original loan to value ratio of 59%.
These loans also had a weighted average debt service coverage ratio of one six times.
Chryssa Halley: Our overall single-family book of business remains strong, but the weighted average market market loan to value ratio of 51%, and weighted average credit score at origination of 753. Our single-family series delinquency rate remained near historically low levels, and as of September 30th stood at 54 basis points, due to current economic conditions, including low unemployment, and thanks to our underwriting standards and effective loan workout options for distressed borrowers.
The overall credit profile of our multifamily book remains strong with a weighted average original loan to value ratio of 64% and a weighted average debt service coverage ratio of two one times.
We continue to monitor the impacts of rising interest rates on our multifamily book right.
Rising rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due.
Roughly two 5% of our multifamily book is expected to mature through the end of 2024.
Chryssa Halley: As projected, a weakening economy may impact the credit performance of loans in our single family guarantee business, which could lead to an increase in our single family series to win currency rate. In the third quarter, we transferred a portion of the credit risk on $49 billion of mortgages through our single family credit risk transfer programs. Now, in multifamily, we acquired $16.4 billion of multifamily loans in the third quarter, which brings our year-to-date acquisitions to $42 billion compared to $51 billion at this time last year.
Rising interest rates will also result in higher monthly payments for borrowers with adjustable rate mortgages, which may lower their debt service coverage ratios.
As of the end of September adjustable rate mortgages made up about 10% of our multifamily book.
In previous calls we've discussed our stressed multifamily seniors housing loans, particularly those that are adjustable rate mortgages.
Our multifamily serious delinquency rate increased to 54 basis points as of September 30th compared to 37 basis points as of June 30th largely driven by seniors housing.
Chryssa Halley: This downward trend is consistent with 2023's lower overall market activity driven by the uncertain market environment and higher interest rates. Despite declining property values in the multifamily market, the multifamily loans we acquired year-to-date have a weighted average original loan to value ratio of 59%. These loans also had a weighted average debt service coverage ratio of 1.6 times. The overall credit profile of our multifamily book remains strong, but the weighted average original loan to value ratio of 64% and a weighted average debt service coverage ratio of 2.1 times.
We are actively pursuing loss mitigation actions when appropriate.
Back then our multifamily serious delinquency rate may decrease as we complete loan workouts, which may resolve their delinquency or if an appropriate workout cannot be achieved the loans are foreclosed upon.
Before we close out.
Touch on our current economic outlook, the strong economic growth Priscilla mentioned has reduced the likelihood of the mild recession, we have expected next year.
We believe the full weight of the dramatic increase in interest rates has yet to be felt mortgage rates, which we currently expect to average six 8% in 2023, coupled with elevated home prices will continue to fuel an uneven supply demand dynamic and housing.
Chryssa Halley: We continue to monitor the impacts of rising interest rates on our multifamily book. Rising rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. Roughly 2.5% of our multifamily book is expected to mature through the end of 2024. Rising interest rates will also result in higher monthly payments for borrowers with adjustable rate mortgages, which may lower their debt service coverage ratios. As of the end of September, adjustable rate mortgages made up about 10% of our multifamily book.
And put stress on affordability.
Given the strong estimated home price growth of six 9% in the first nine months of the year, We project National home price growth of six 7% for the full year.
Our expectations are based on many assumptions and our actual results could differ materially from our current expectations I invite you to visit our web pages, where you'll find a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today.
Chryssa Halley: In previous calls, we've discussed our stressed multifamily seniors housing loans, particularly those that are adjustable rate mortgages. Our multifamily series, the linkancy rate, increased to 54 basis points as of September 30th, compared to 37 basis points as of June 30th, largely driven by seniors housing. We are actively pursuing loss mitigation actions when appropriate.
Thank you everyone that concludes today's call you may disconnect.
Okay.
Chryssa Halley: We expect that our multifamily series, the linkancy rate, may decrease as we complete loan workouts, which may resolve their delinquency, or if an appropriate workout cannot be achieved, the loans are foreclosed upon.
Chryssa Halley: Before we close out, I'll touch on our current economic outlook. The strong economic growth Priscilla mentioned has reduced the likelihood of the mild recession we have expected next year. But we believe the full weight of the dramatic increase in interest rates has yet to be felt. Mortgage rates, which we currently expect to average 6.8% in 2023, coupled with elevated home prices, will continue to fuel in uneven supply demand dynamic in housing and put stress on affordability.
Okay.
Chryssa Halley: Given the strong estimated home price growth of 6.9% in the first nine months of the year, we project national home price growth of 6.7% for the Our expectations are based on many assumptions and our actual results could differ materially from our current expectations.
Okay.
Chryssa Halley: I invite you to visit our web pages where you'll find a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today. Thank you everyone.
Operator: That concludes today's call.
Operator: You may disconnect.