Q2 2024 Federal National Mortgage Association Earnings Call

Happy Halloween!

Pete Bakel: Good day, and welcome to the Fannie Mae 2nd Quarter 2024 Financial Results Conference Call. At this time, I will now turn it over to your host, Pete Bakel, Fannie Mae's Director of External Communications.

Good day and welcome to the Fannie Mae 2nd Quarter 2024 Financial Results Conference Call. At this time, I will now turn it over to your host, Pete Bakel, Fannie Mae's Director of External Communications.

Pete Bakel: Hello, and thank you all for joining today's conference call to discuss Fannie Mae's second quarter 2024 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 company's book of business, and the company's business plans and their impact. Future events may turn out to be very different from these statements. The forward-looking statements section in the company's second quarter 2024 Form 10-Q, filed today, and in the risk factors and forward-looking statement sections in the company's 2023 Form 10-K, filed on February 15th, 2024, describe factors that may lead to different results.

Pete Bakel: Hello, and thank you all for joining today's conference call to discuss Fannie Mae's second quarter 2024 financial results.

Speaker Change: 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 company's book of business, and the company's business plans and their impact. Future events may turn out to be very different from these statements.

Speaker Change: The forward-looking statements section in the company's second quarter 2024 Form 10-Q filed today.

Speaker Change: and in the risk factors and forward-looking statement sections in the company's 2023 Form 10-K , filed on February 15, 2024, describe factors that may lead to different results.

Pete Bakel: 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript. I'd now like to turn the call over to Fannie Mae President and Chief Executive Officer, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Chrissa C. Halley.

Speaker Change: 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.

Speaker Change: I'd now like to turn the call over to Fannie Mae President and Chief Executive Officer Priscilla Almodovar and Fannie Mae Chief Financial Officer Chrissa C. Halley.

Priscilla Almodovar: Welcome and thank you for joining us. I'll start by spending a few minutes on the economic environment before speaking to our financial and mission performance for the second quarter of 2024. After that, our Chief Financial Officer, Chrissa Haley, will discuss our quarterly results in more detail. Now, turning to the economy. While inflation slowed in the second quarter, a higher-for-longer interest rate environment continued as the Fed has made clear that incoming data will determine the pace of rate cuts.

Priscilla Almodovar: Welcome and thank you for joining us. I'll start by spending a few minutes on the economic environment before speaking to our financial and mission performance for the second quarter of 2024. After that, our Chief Financial Officer, Chrissa Haley, will discuss our quarter results in more detail.

Speaker Change: Now turning to the economy. While inflation slowed in the second quarter, a higher for longer interest rate environment continued as the Fed has made clear that incoming data will determine the pace of rate cuts.

Priscilla Almodovar: The 30th fixed-rate mortgage rate averaged 7% during the quarter, and we estimate that home prices increased 3% during the quarter and 5.2% since the start of the year. Affordability concerns, together with a low inventory of homes for sale, continue to limit the number of buyers willing and able to buy a home, even as listings have begun to rise. You can see this in our July Home Purchase Sentiment Index, where only 19% of consumers say that it's a good time to buy a home.

Speaker Change: The 30-year fixed rate mortgage rate averaged 7% during the quarter, and we estimate that home prices increased 3% during the quarter and 5.2% since the start of the year.

Speaker Change: Affordability concerns together with a low inventory of homes for sale continue to limit the number of buyers willing and able to buy a home even as listings have begun to rise.

Speaker Change: You can see this in our July Home Purchase Sentiment Index, where only 19% of consumers say that it's a good time to buy a home.

Priscilla Almodovar: In many parts of the country, affordability remained a challenge for renters, too. Nationally, we estimate rents grew about 100 basis points in the second quarter, compared to 25 basis points in the first quarter. Our economists expect that similar affordability challenges will persist for the remainder of the year. Now, turning to our second quarter financial results. We reported $4.5 billion in net income compared to $4.3 billion in the first quarter.

Speaker Change: In many parts of the country, affordability remained a challenge for renters too. Nationally, we estimate rents grew about 100 basis points in the second quarter, compared to 25 basis points in the first quarter.

Speaker Change: Our economists expect that similar affordability challenges will persist for the remainder of the year.

Speaker Change: Now turning to our second quarter financial results. We reported 4.5 billion dollars in net income compared to 4.3 billion in the first quarter.

Priscilla Almodovar: As a result, we continue to reduce our capital shortfall and build our network. Our net worth reached $86.5 billion, further strengthening our financial stability. We provided $95 billion of liquidity to the single-family and multifamily markets in the second quarter. This helped 330,000 households buy, refinance, or rent a home. This included approximately 72,000 units of multifamily rental housing, a significant majority of which were affordable to households earning at or below 120 percent of the area median income.

Speaker Change: As a result, we continue to reduce our capital shortfall and build our net worth.

Speaker Change: Our net worth reached $86.5 billion, further strengthening our financial stability.

Speaker Change: We provided $95 billion of liquidity to the single-family and multifamily markets in the second quarter.

Speaker Change: This helped 330,000 households buy, refinance, or rent a home.

Speaker Change: This included approximately 72,000 units of multifamily rental housing.

Speaker Change: A significant majority of which were affordable to households earning at or below 120% of area median income. We also helped 108,000 first-time homebuyers to buy a home.

Priscilla Almodovar: We also helped 108,000 first-time homebuyers to buy a home. I'm proud of this work and our many efforts to advance the nation's housing market, which includes publishing informative research and insight.

Speaker Change: I'm proud of this work and our many efforts to advance the nation's housing market. This includes publishing informative research and insights. For example, we recently refreshed our mortgage understanding study, last completed in 2018.

Priscilla Almodovar: For example, we recently refreshed our mortgage understanding study, last completed in 2018. Today's market is very different and tougher for homebuyers. Our study shines a light on consumers' thoughts about home buying, what they know about today's mortgage process, and misconceptions they may have. Two key findings are, one, while the percentage of consumers who feel it is a good time to buy a home is historically low, the dream of home ownership remains high, and two, the knowledge of what it takes to qualify for a mortgage is mixed.

Speaker Change: Today's market is very different and tougher for homebuyers.

Speaker Change: Our study shines a light on consumers' thoughts about home buying, what they know about today's mortgage process, and misconceptions they may have.

Speaker Change: Two key findings are, one, while the percentage of consumers who feel it is a good time to buy a home is historically low, the dream of home ownership remains high.

Speaker Change: And two, the knowledge of what it takes to qualify for a mortgage is mixed.

Priscilla Almodovar: This is a call to action for all of us to continue to work together to make the mortgage process clearer, simpler, and smarter and to further support consumers on their path to home ownership through outreach and innovation. That's why Fannie Mae continues to innovate to reduce key obstacles that many consumers face, such as limited credit history and high upfront costs. In addition, we continue to advance innovative ways to connect global capital to U.S. housing.

Speaker Change: This is a call to action for all of us to continue to work together to make the mortgage process clearer, simpler, and smarter, and to further support consumers in their path to home ownership through outreach and innovation.

Speaker Change: That's why Fannie Mae continues to innovate to reduce key obstacles that many consumers face, such as limited credit history and high upfront costs.

Speaker Change: In addition, we continue to advance innovative ways to connect global capital to U.S. housing.

Priscilla Almodovar: In the first half of this year, we issued over $5 billion in single-family social bonds and over $4 billion in multi-family social bonds. These bonds help mortgage-backed security investors allocate their capital in support of affordable housing and underserved borrowers and markets. I encourage you to learn more about our work, which is detailed in our 2023 Corporate Responsibility and Impact Report that we released earlier this month. Our actions to provide liquidity, stability, and affordability to the U.S. housing market are grounded in our mission and made stronger by our focus on risk and control, and our improved financial stability enables us to be a reliable source of mortgage credit for America's homeowners and renters.

Speaker Change: In the first half of this year, we issued over $5 billion in single-family social bonds and over $4 billion in multi-family social bonds.

Speaker Change: These bonds help mortgage-backed security investors allocate their capital in support of affordable housing and underserved borrowers and markets.

Speaker Change: I encourage you to learn more about our work, which is detailed in our 2023 Corporate Responsibility and Impact Report we released earlier this month.

Speaker Change: Our actions to provide liquidity, stability, and affordability to the U.S. housing market are grounded in our mission and made stronger by our focus on risk and controls.

Speaker Change: And our improved financial stability enables us to be a reliable source of mortgage credit for America's homeowners and renters.

Priscilla Almodovar: Before I turn it to Krissa, I want to thank my colleagues across Fannie Mae who come to work every day with a shared commitment to our mission. Now Krissa will address our quarter two results in more detail.

Speaker Change: Before I turn it to Krissa, I want to thank my colleagues across Fannie Mae who come to work every day with a shared commitment to our mission.

Chryssa C. Halley: Thank you, Priscilla, and good morning. As Priscilla mentioned, we reported $4.5 billion in net income in the second quarter, a $164 million increase compared to the first quarter of this year. Our second quarter revenues remain strong at $7.3 billion thanks to Healthy Guarantee Fee Income. We saw a benefit for credit losses this quarter of $300 million compared to the $180 million benefit we recorded in the first quarter.

Speaker Change: Now Krissa will address our quarter two results in more detail.

Krissa: Thank you, Priscilla, and good morning.

Krissa: As Priscilla mentioned, we reported $4.5 billion in net income in the second quarter.

Krissa: a $164 million increase compared to the first quarter of this year. Our second quarter revenues remain strong at $7.3 billion thanks to Healthy Guarantee Fee Income.

Chryssa C. Halley: This was driven by a release in single-family reserves, partially offset by an increase in multifamily reserves. The reduction in single-family reserves was primarily due to increases in actual and forecasted single-family home prices, partially offset by a provision on newly acquired single-family loans. The increase in multifamily reserves was due primarily to continued declines in actual and near-term projected property values and the impact of new 30-day loan delinquencies. In our single-family business, we acquired $86 billion of single-family loans in the second quarter. This was a 38% increase compared to the prior quarter, consistent with seasonal purchase activity. However, despite this increase, our acquisition volumes remained low, reflecting low overall market activity and increased competition.

Speaker Change: We saw a benefit for credit losses this quarter of $300 million compared to the $180 million benefit we recorded in the first quarter.

Speaker Change: This was driven by a release in single-family reserves, partially offset by an increase in multifamily reserves.

Speaker Change: The reduction in single-family reserves was primarily due to increases in actual and forecasted single-family home prices partially offset by a provision on newly acquired single-family loans.

Speaker Change: The increase in multifamily reserves was due primarily to continued declines in actual and near-term projected property values and the impact of new 30-day loan delinquencies.

Speaker Change: In our single-family business, we acquired $86 billion of single-family loans in the second quarter.

Speaker Change: This was a 38% increase compared to the prior quarter, consistent with seasonal purchase activity. Despite this increase, our acquisition volumes remained low, reflecting low overall market activity and increased competition.

Chryssa C. Halley: Not surprisingly, given the interest rate environment, 87 percent of these acquisitions were purchased loans. The credit profile of our single-family acquisitions in the second quarter remained healthy, with a weighted average original loan-to-value ratio of 78 percent and a weighted average credit score of 759. In addition, the credit profile of our single-family book remained strong, with a weighted average mark-to-market loan-to-value ratio of 50 percent and a weighted average credit score at origination of 753.

Speaker Change: Not surprisingly.

Speaker Change: Given the interest rate environment, 87% of these acquisitions were purchased loans.

Speaker Change: The credit profile of our single-family acquisitions in the second quarter remained healthy.

Speaker Change: with a weighted average original loan-to-value ratio of 78%.

Speaker Change: and a weighted average credit score of 759.

Speaker Change: Further, the credit profile of our single-family book remains strong, with a weighted-average mark-to-market loan-to-value ratio of 50% and a weighted-average credit score at origination of 753.

Chryssa C. Halley: Our single-family serious delinquency rate remained near historically low levels as of June 30th at 48 basis points compared to 51 basis points in the prior quarter. However, a slowing economy may impact the credit performance of loans in our single-family guarantee book, which could lead to an increase in our single-family serious delinquency rate. Turning to single family credit risk transfer, we executed four transactions in the second quarter between our Connecticut Avenue Securities, or CAS, and Credit Insurance Risk Transfer Programs, transferring a portion of the credit risk on approximately $65 billion of unpaid principal balance at the time of the transactions.

Speaker Change: Our single-family serious delinquency rate remained near historically low levels as of June 30th at 48 basis points compared to 51 basis points in the prior quarter.

Speaker Change: A slowing economy may impact the credit performance of loans in our single-family guarantee book, which could lead to an increase in our single-family serious delinquency rate.

Speaker Change: Turning to single-family credit risk transfer, we executed four transactions in the second quarter between our Connecticut Avenue Securities or CAS.

Speaker Change: and Credit Insurance Risk Transfer Programs.

Speaker Change: transferring a portion of the credit risk on approximately 65 billion dollars of unpaid principal balance at the time of the transactions.

Chryssa C. Halley: In Q2, we also repurchased certain CAS notes and terminated two CAS deals that provided minimal credit protection, reducing lifetime expenses associated with these transactions. Additionally, we paid $363 million in premiums during the quarter on our outstanding single-family credit risk transfer transaction.

Speaker Change: In Q2, we also repurchased certain CAS notes and terminated two CAS deals that provided minimal credit protection, reducing lifetime expenses associated with these transactions.

Speaker Change: We paid $363 million in premiums during the quarter on our outstanding single-family credit risk transfer transactions.

Chryssa C. Halley: In our multifamily business, we acquired approximately $9 billion in multifamily loans this quarter, bringing our 2024 multifamily acquisitions through June 30th of this year to over $19 billion, compared to approximately $25 billion in the first half of 2023. This decline reflects low overall multifamily market volumes and increased competition. Our overall multi-family book had a weighted average original loan-to-value ratio of 63% and a weighted average debt service coverage ratio of 2 times.

Speaker Change: in our multifamily business.

Speaker Change: We acquired approximately $9 billion in multifamily loans this quarter.

Speaker Change: bringing our 2024 Multifamily Acquisitions through June 30th.

Speaker Change: of this year to over 19 billion dollars.

Speaker Change: compared to approximately $25 billion.

Speaker Change: in the first half of 2023. This decline reflects low overall multifamily market volumes and increased competition.

Speaker Change: Our overall multi-family book had a weighted average original loan-to-value ratio of 63% and a weighted average debt service coverage ratio of 2 times.

Chryssa C. Halley: In the second quarter, multifamily property values continued to decline. According to data from the MSCI Real Assets Commercial Property Price Index, multifamily property values declined nearly 20 percent from the peak in July 2022 to June 2024 and are now back to the levels last seen in 2021. This is compared to the 19% decline from July 2022 to March 2024 that we mentioned last quarter. We continue to monitor the impacts of elevated interest rates on our multifamily book.

Speaker Change: In the second quarter, multifamily property values continued to decline.

Speaker Change: According to data from the MSCI Real Assets Commercial Property Price Index, multifamily property values declined nearly 20% from the peak in July 2022 to June 2024.

Speaker Change: and are now back to the levels last seen in 2021. This is compared to the 19% decline from July , 2022 to March, 2024 that we mentioned last quarter.

Speaker Change: We continue to monitor the impacts of elevated interest rates on our multifamily book.

Chryssa C. Halley: Higher rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. While our near-term maturities remain low, market maturities are expected to be elevated, which could put additional pressure on the multifamily market. Roughly 1.2% of our multifamily book is expected to mature in 2024, and approximately 3.4% is expected to mature in 2025. Our multifamily serious delinquency rate remained at 44 basis points in the second quarter.

Speaker Change: Higher rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due.

Speaker Change: While our near-term maturities remain low, market maturities are expected to be elevated, which could put additional pressure on the multifamily market.

Speaker Change: Roughly 1.2% of our multifamily book is expected to mature in 2024 and approximately 3.4% is expected to mature in 2025.

Speaker Change: Our multifamily serious delinquency rate remained at 44 basis points in the second quarter.

Chryssa C. Halley: We expect our multifamily serious delinquency rate to increase in the near term due to a portfolio of approximately $600 million of adjustable-rate conventional loans that we anticipate will become seriously delinquent. Lastly, I'll touch on our current economic outlook. Our economists currently expect two rate cuts from the Federal Reserve later this year.

Speaker Change: We expect our multifamily serious delinquency rate to increase in the near term due to a portfolio of approximately $600 million of adjustable rate conventional loans that we anticipate will become seriously delinquent.

Chryssa C. Halley: However, they do not forecast a ramp-up in housing activity. For this to occur, they think the market will need to see some combination of continued household income growth, a further slowing of home price appreciation, or a decline in mortgage rates to bring affordability within the reach of many homebuyers. Our current forecast is that home prices will rise 6.1% in 2024, up 1.3 percentage points from last quarter's projection. We expect single-family mortgage originations to grow from $1.5 trillion in 2023 to approximately $1.7 trillion in 2024, with purchases making up 80% of single-family mortgage originations this year.

Speaker Change: Lastly, I'll touch on our current economic outlook.

Speaker Change: Our economists currently expect two rate cuts from the Federal Reserve later this year.

Speaker Change: However, they do not forecast a ramp-up in housing activity. For this to occur, they think the market will need to see some combination of continued household income growth.

Speaker Change: A further slowing of home price appreciation or a decline in mortgage rates to bring affordability within range of many homebuyers.

Speaker Change: Our current forecast is that home prices will rise 6.1% in 2024, up 1.3 percentage points from last quarter's projection.

Speaker Change: We expect single-family mortgage originations to grow from $1.5 trillion in 2023 to approximately $1.7 trillion in 2024, with purchases making up 80% of single-family mortgage originations this year.

Chryssa C. Halley: 2024 Multifamily Market Origination Volumes are now expected to be between $245 billion and $315 billion with a baseline of $275 billion. This is not much different from our estimated $265 billion in multifamily volumes for 2023, but down significantly from $480 billion in 2022. We believe that with continued high interest rates, elevated new supply completions, and higher than average vacancy rates, multifamily sales activity will remain subdued in the near term, which could result in additional declines in multifamily property values over the short term.

Speaker Change: 2024 Multifamily Market Origination Volumes are now expected to be between $245 billion to $315 billion, with a baseline of $275 billion.

Speaker Change: This is not much different from our estimated $265 billion in multifamily volumes for 2023, but down significantly from $480 billion in 2022.

Speaker Change: We believe that with continued high interest rates, elevated new supply completions,

Speaker Change: and higher than average vacancy rates, multifamily sales activity will remain subdued in the near term, which could result in additional declines and multifamily property values over the short term.

Chryssa C. Halley: Over the longer term, however, we expect sales and valuations to improve due to expected improvements in multifamily housing market fundamentals stemming from positive demographic trends and ongoing job growth. However, we expect rent growth to remain below historical averages in the 1% to 1.5% range in 2024 as a result of elevated new construction completions and many renters dealing with higher levels of consumer debt. Our expectations are based on many assumptions, and our actual results could differ materially from our current expectations. I invite you to visit FannieMae.com, where you'll find a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today.

Speaker Change: Over the longer term, however, we expect sales and valuations will improve due to expected improvements in multifamily housing market fundamentals.

Speaker Change: stemming from positive demographic trends and ongoing job growth.

Speaker Change: We expect rent growth to remain below historical averages in the 1% to 1.5% range in 2024 as a result of elevated new construction completions and many renters dealing with higher levels of consumer debt.

Speaker Change: Our expectations are based on many assumptions and our actual results could differ materially from our current expectations.

Speaker Change: I invite you to visit FannieMae.com where you'll find a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today.

Operator: Thank you, everyone. That concludes today's call. You may disconnect.

Speaker Change: Thank you everyone. That concludes today's call. You may disconnect.