Fannie Mae Second Quarter 2018 Earnings Media Call Remarks

Adapted from Comments Delivered by Timothy J. Mayopoulos, President and CEO, and David Benson, Executive Vice President and Chief Financial Officer, Fannie Mae, Washington, DC

Introduction
Timothy Mayopoulos: Good morning everybody. Thank you for joining us this morning to discuss Fannie Mae's second quarter results.

I'm joined this morning by David Benson, our Chief Financial Officer. As we announced last week, I will step down as Fannie Mae's CEO by the end of the year and I am delighted that, as of August 6, Dave will become our new president.

Dave and I have worked together very closely for over nine years, including the last five and a half years with Dave as our CFO. Our new CFO will be Celeste Brown, who joined our company one year ago following an 18-year career at Morgan Stanley.

Dave and Celeste are just two members of the broader leadership team that has been foundational to Fannie Mae's success. Our team is talented, experienced, and focused on adding to that success in the years to come.

Since this is Dave's last call as CFO, I've asked him to start us off with a review of our quarterly results. Then I will offer some thoughts about the company's progress, and we'll leave plenty of time at the end for questions.

The Second Quarter
David Benson: Thanks, Tim. Before I get into this quarter's results I would just like to say that all of us here at Fannie Mae are very grateful for your leadership as CEO these last six years. I also appreciate the opportunity that you and the board have given me to serve in my new role as president of the company.

Now let me briefly summarize our quarterly results and call out a few highlights.

For the second quarter, we reported $4.5 billion in net income and $4.5 billion in comprehensive income. This compares with net income of $4.3 billion and comprehensive income of $3.9 billion for the first quarter of the year. Our pre-tax income was $5.6 billion for the second quarter, compared with $5.4 billion for the first quarter.

Our increase in net income for the quarter was driven primarily by higher credit-related income. This was notably impacted by the assignment of a sizeable population of our re-performing and nonperforming loans from held-for-investment to a held-for-sale designation. This change in designation precedes the sale of the loans to other investors.

Another factor boosting our credit-related income was the improvement in home prices seen during the quarter. Partially offsetting these increases in net income, we experienced lower fair value gains in the second quarter compared to the first quarter, mostly due to lesser increases in long-term interest rates.

Based on our quarterly results, we expect to pay a dividend of $4.5 billion to Treasury in September 2018 and we will continue to retain a total of $3 billion in capital.

Beyond these top-line numbers, let me call out a few highlights from the quarter.

Overall, the second quarter performance reflects solid fundamentals in both our Single-Family and Multifamily businesses. Both segments are managing and distributing risk in sustainable, efficient, and innovative ways, and each has solid revenue streams driven by guaranty fees on our stable book of business.

We provided $125 billion of liquidity to the mortgage market in the second quarter through guarantees and loan purchases. This supported 298,000 home purchases, 179,000 home refinances, and financing for 188,000 multifamily rental units.

This quarter, we remained the largest issuer of single-family mortgage-related securities in the secondary market.

The serious delinquency rate of our single-family book was 0.97% at the end of June. This compares to an SDQ rate of 1.16% as of March and 1.24% as of December 2017. This rate has resumed its downward trend after its brief move upward after last year's hurricane season. We expect our single-family SDQ rate will continue to trend lower, but may exhibit quarter-to-quarter fluctuations away from trend from time to time.

Finally, our Multifamily business volume in the first six months of the year was more than $25 billion and we continue to be a leader in affordable workforce rental housing. In fact, more than 90% of the multifamily units we supported in the second quarter were affordable to families earning at or below 120% of area median income.

You can find more information on the drivers of our second quarter results in our press release and our Form 10-Q, which we filed today.

With that, let me turn it back over to Tim.

A Decade of Progress
Timothy Mayopoulos: Thanks, Dave. Before taking your questions, let me provide some thoughts on the company as a whole and on our progress.

As I've said on previous calls, our quarterly results reflect a business strategy that is focused on our customers. Our results are also the product of a decade of hard work to strengthen both Fannie Mae and housing finance.

Nearly 10 years ago, Fannie Mae entered conservatorship in the depths the financial crisis. For Fannie Mae, it has been a decade of reform and fundamental change. During these 10 years we have achieved more than most people thought possible, while remaining focused on our mission and purpose.

We helped millions of people stay in their homes in the wake of the crisis and helped millions more buy, refinance, and rent homes in the years of recovery.

We returned to profitability in 2012 and have paid nearly $50 billion more in dividends to Treasury than we have received in taxpayer support.

We built a strong book, improved our business model, and reduced risk to taxpayers.

We have reduced our retained mortgage portfolio, reducing the company's risk exposure. Today, guaranty fees are a stable and reliable primary driver of our revenue.

We have evolved from being a company that buys and stores credit risk to one that also distributes credit risk, attracting global capital to the U.S. mortgage market.

Over the past five years, we've transferred a portion of the credit risk on a nearly $1.4 trillion of single-family loans, measured in unpaid principal balance at the time of the transaction. As of the end of June, 35% of our single-family conventional guaranty book of business was covered by a credit risk transfer transaction.

At the same time, we are introducing industry-changing innovations for customers, investors, and other partners. These innovations will make housing finance better, safer, and more efficient for future generations.

We're testing new technologies to make the mortgage process simpler and more certain. As we do so, we are partnering with customers and putting them at the center of everything that we do.

Frankly, in the past we too often developed solutions based on what we thought our customers should want. Today, we use design thinking and customer co-development panels to create the solutions they actually want.

Step by step, we're advancing toward the day of the fully digital mortgage. Deal by deal, we're enhancing our position of world leadership in green financing for our multifamily customers.

And last week, we issued the market's first-ever securities indexed to the Secured Overnight Financing Rate (SOFR), a new benchmark alternative to LIBOR. 

We are also working with new and different kinds of partners on innovations to make our communities more sustainable.

And we are convening partners across the full spectrum of housing to address our nation's most important housing challenges, such as the crisis in the supply of affordable housing.

Behind all these efforts is our core commitment to creating new opportunities for homeowners and renters and to making housing finance stronger, safer, and more sustainable.

Conclusion
The changes we put in place have resulted in a company far removed from the one that I came to. It is a company with a strong sense of stewardship, but also a commercial mindset, growing agility, and a willingness to try new approaches. It is a Fannie Mae that is in a stronger position to help tackle our important housing challenges.

I want to thank our entire team at Fannie Mae for the great work and leadership that has made this progress possible. I also want to thank Dave for agreeing to step in as president, starting next week. I am proud of what we've accomplished and what we will accomplish going forward.

With that, let me thank all of you for joining today's call and we'll be glad to answer any questions you may have.