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Fannie Mae First Quarter 2017 Earnings Media Call Remarks from Timothy J. Mayopoulos

May 5, 2017

Good morning everyone. Thanks for joining us on this call as we discuss our first quarter 2017 financial results.

Our business this past quarter reflects two ongoing trends for Fannie Mae. First, the mortgage market and our business continue to perform solidly. Second, our stronger business model, our customer-centric strategy, and our focus on innovation are delivering real value to customers, to the mortgage market, to homeowners and renters, and to taxpayers.

This morning, I will provide a high-level overview of our quarterly financial results. Then, I will share some examples of the ways we are advancing our business strategy in 2017.

Business Results

First, let’s review the quarter. In this quarter, interest rates had less of an impact on our results than they did in the fourth quarter of 2016. And we continued to see ongoing improvement in our credit performance.

We reported net income of $2.8 billion and comprehensive income of $2.8 billion. This compares with net income of $5 billion and comprehensive income of $4.9 billion for the fourth quarter of 2016. The main driver of the difference in net income between the last two quarters was a significantly smaller increase in long-term interest rates in the first quarter as compared to the fourth quarter.

Large increases in longer-term interest rates in the fourth quarter resulted in substantial fair value gains on the company’s risk management derivatives for the quarter, as well as credit-related expenses that partially offset those gains. By contrast, interest rates increased only slightly in the first quarter of 2017, and therefore did not have a substantial impact on these items.

Detailed information regarding the drivers of our results is in our press release and quarterly report on Form 10Q, which we filed today.

As you know, we do not control a number of factors that drive our financial results, including long-term interest rates. As I have said on past calls, these factors can cause volatility in our financial results, and they may have a positive or negative effect in any given quarter or year. The difference in our results from the fourth quarter to the first quarter this year reflect this dynamic.

These variables aside, our guaranty business remained strong in the first quarter. Our guaranty business is the main driver of our revenues, accounting for more than 75 percent of our net interest income in the first quarter. We expect that percentage to continue to grow.

Our acquisition volume in the first quarter of 2017 was down from the last quarter of 2016. This was expected and it’s important to note that this current quarter’s volume was higher than we saw in first quarter of 2016. So some of what we are seeing is seasonal variation in the market. Decreased refinance volumes due to interest rate increases also played a role.

All in all, however, our credit book is stable, and it actually grew slightly from where it ended 2016.

Lastly, the credit metrics in our Single-Family business continued to improve. Our Single-Family serious delinquency rate has decreased for 28 consecutive quarters and was 1.12 percent as of the end of March.

Our first quarter demonstrates strong earnings in a quarter where we did not see significant volatility, and this is a reflection of our stable and strong book of business. We remained the largest provider of secondary mortgage market liquidity in the first quarter, providing approximately $136 billion in mortgage financing that helped families buy, refinance,or rent a home.

We expect to pay another $2.8 billion in dividends to the Treasury in June, which will bring our total dividend payments to Treasury and the taxpayers to $162.7 billion since 2008.

While we expect to remain profitable on an annual basis for the foreseeable future, we could experience a net worth deficit in a future quarter. As we have discussed before, this is due to our limited and declining capital reserves and the potential for significant volatility in our financial results due to factors that we do not control, such as interest rates and home prices.

In addition, as we describe in our filing, future legislative or regulatory changes also could result in a net worth deficit in a future period. For instance, the Administration has proposed a significant reduction in the corporate tax rate. If Congress enacts such a reduction, it would negatively affect the value of our deferred tax assets and, we expect, result in a significant net loss and net worth deficit for the quarter in which the legislation is enacted. Such a deficit would require us to draw additional funds from Treasury.

Our capital reserve now stands at $600 million. Under the terms of the senior preferred stock purchase agreement with Treasury, our capital will go to zero in 2018.

Strategic Progress

Against this backdrop, our focus has not changed. That focus remains fixed on our strategy and our role to provide a continuous, reliable source of liquidity for housing finance. Our strategy is built around our customers, making it easier for them to do business with us and helping them solve some of their most important business challenges.

Before I open it up to questions, I want briefly to highlight a few areas of progress and innovation where Fannie Mae is delivering for our customers.

First, we continue to see a very positive response from customers on our Day 1 Certainty initiative. Day 1 Certainty helps our customers verify borrower assets, income, and employment on the front end of the loan process. Day 1 Certainty tools also enable lenders to have more certainty on home appraisals.

It is still early, but already more than 1,000 customers have activated one or more of the Day 1 Certainty data validation services. Uptake of the tools has increased steadily and we expect it to continue to grow as we continue to make them better and more accessible. Feedback from customers has been positive, with lenders reporting significant reductions in closing times and fewer burdens on borrowers.

Fully implementing all of the Day 1 Certainty tools will take time. But we are pleased with the progress so far, and we believe that Day 1 Certainty is an important step on the path towards a digital mortgage process.

We are also bringing an innovation mindset to our Multifamily business. Fannie Mae’s Multifamily business continues to lead the market in Green Financing, which helps multifamily owners preserve and upgrade affordable rental properties. We provided $3.6 billion in Green Financing in 2016. This fills a significant need in the marketplace, as property owners look to upgrade older properties and make them more energy and water efficient. We were recognized for this innovative program last month when we received the Energy Star Partner of the Year award for the third year in a row.

A third example of how we are innovating to deliver greater value to the market is our recent expansion of solutions to help borrowers burdened by student debt. This is an illustration of our willingness to be creative across our business in introducing new options for borrowers that are flexible, safe, and affordable.

Student debt levels are up 70 percent in the last decade. Forty-four million Americans have some amount of student debt, and recent graduates are leaving school with an average of $34,000 in debt. Many borrowers say their student debt is a hurdle when financing a home.

With mortgage rates still near-record lows, we have developed a new way to convert student debt into lower-cost mortgage debt. We enhanced this product last month to provide more tools for lenders to serve new and first-time homebuyers and help people pay down student debt.

These are just three examples of how we are creating new ways to make business easier and more efficient for our customers, and helping our customers better serve their customers: the millions of Americans who are looking for a better mortgage process and housing options that are affordable and sustainable.

We look forward to taking more strides on this journey throughout the course of 2017 and beyond.


With that, let me reiterate that our business fundamentals are strong, and our business strategy is delivering results for our customers and the housing finance market. I appreciate your time this morning, and I am happy to open it up for your questions.

Thank you for your questions and have a good day.