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Fannie Mae Fourth Quarter and Full Year 2017 Earnings Media Call Remarks

February 14, 2018

Adapted from Comments Delivered by Timothy J. Mayopoulos, President and CEO, Fannie Mae, Washington, DC

Thanks for joining us for today's call. 

I'm pleased to update you on another solid quarter and another solid year. I'll make some brief comments and then our Chief Financial Officer David Benson and I will open it up for your questions. 

Fourth Quarter
Let me start with the fourth quarter of 2017. Our business performance in the quarter was excellent with pre-tax income of $5 billion. Like many companies, however, our fourth quarter results were adversely impacted by the recent tax legislation.

We reported a net loss of $6.5 billion for the quarter and a comprehensive loss of $6.7 billion. This compares to net income of $3.0 billion and comprehensive income of $3.0 billion for the third quarter of 2017.

The primary driver of changes in our results for the fourth quarter was a $9.9 billion provision for federal income taxes resulting from the remeasurement of the company’s deferred tax assets. The Tax Act reduced the corporate tax rate from 35 percent to 21 percent, and accordingly this required us to write down the value of our deferred tax assets. As a result, we had a net worth deficit of $3.7 billion as of December 31, 2017, and we will require a draw from Treasury to eliminate this deficit.

This was an expected, one-time outcome of the tax bill and is not a reflection of our underlying business, which remains strong. Going forward, the impact of the lower tax rate will accrue to the benefit of our future net income.

Another important event that happened in the fourth quarter was the agreement with Treasury to revise the terms of Fannie Mae's senior preferred stock. Under the terms of the agreement, Fannie Mae may now retain up to $3.0 billion in capital reserves. Once we are able to rebuild this capital cushion with future earnings, it will enable us to weather modest volatility in our quarterly results.

I would like to point out, however, that this does not constitute a comprehensive recapitalization event. While this will help us reduce the probability of requiring a Treasury draw in quarters where losses do not exceed the capital retained up to $3.0 billion, we recognize that by any reasonable standard, our company and the housing finance system it supports will require substantially more to be considered properly capitalized.

Looking at 2017 as a whole, I am very pleased with our progress. We paid $12.0 billion in dividends to Treasury in 2017, bringing our total dividends to taxpayers to $166.4 billion. This compares to the $119.8 billion in draws that we have received or expect to receive shortly. Our pre-tax income was $18.4 billion, very much in line with pretax income of $18.3 billion 2016. As we had consistently forecasted, we were profitable for the year. Our 2017 net income was $2.5 billion and our comprehensive income was $2.3 billion. Again, both of these reflect the effects of the recent tax bill.

More broadly, we are very proud of our 2017 business accomplishments. We continued to deliver innovative solutions to help our customers meet their biggest challenges. In our Single-Family business, we built on our Day 1 Certainty solutions. We’ve laid the groundwork for Single Source Validation, a solution that will allow lenders to validate borrower financial information with a single asset report, instead of two or three. This will cut time and cost out of the mortgage process for our customers and for their customers.

We are introducing an application program interface platform, also known as APIs, to make it easier for our customers to plug into our data and technology. We are cutting costs out of servicing mortgages and making life simpler for our servicers.

In our Multifamily business, we enhanced our delegations to our customers and achieved record volume as lenders and borrowers increasingly recognize the unique benefits of our Delegated Underwriting and Servicing model.

We strengthened our business model by continuing to grow our credit risk transfer program. Fannie Mae has transferred a portion of the mortgage credit risk on single-family mortgages with an unpaid principal balance of more than $1.2 trillion since 2013, measured at the time of the transactions. As a result, approximately 32 percent of the loans on the company’s single-family book were covered by a credit risk transfer transaction as of year-end.

And our revenue mix continued to change. Guaranty fees continued to drive a greater portion of our net interest income as the size of our mortgage investment portfolio declined.

Looking ahead, I’m excited about 2018. Our business fundamentals are strong and we expect to be profitable on an annual basis. We are in a very strong position to continue to deliver value to our customers with more innovations and tools to help them grow their business and serve more families. We will continue to focus on our customers and on building a stronger housing finance system for the future.

Now I'm happy to open it up for your questions.