Fannie Mae Fourth Quarter and Full-Year 2020 Earnings Media Call Remarks
Hugh R. Frater:
Welcome and good morning.
Thank you for joining us to discuss our fourth-quarter and year-end results for 2020.
Before I hand off to Celeste to discuss our results in depth, I’d like to offer a few thoughts on the extraordinary year behind us and the road ahead in 2021.
Thoughts on 2020
2020 was truly an historic "mission moment" for Fannie Mae.
As you know, we were chartered over 80 years ago to ensure a liquid secondary market for housing finance — in both good times and bad for lenders both large and small. Our mission is to help ensure that housing finance is affordable and available, and I believe that we have fulfilled that mission very well through most of our existence.
Much has been written about the causes of the last financial crisis in 2008 and the roles of the various actors, including the GSEs. But there is little debate about the positive role we are playing in today's COVID crisis. That's because today’s Fannie Mae is very different and far more resilient than the Fannie Mae of yesterday.
And, in 2020, with the greatest labor market disruption since the Great Depression, we provided historic amounts of liquidity to the mortgage market and we provided forbearance to more than one million homeowners to help keep them in their homes.
In partnership with our Board of Directors and our conservator, FHFA, we have spent the past dozen years transforming Fannie Mae to prepare for a mission moment like this.
Our immediate and most urgent focus this past year was helping America's homeowners and renters who were struggling with the economic impact of the global pandemic.
Working closely with FHFA, we launched critical solutions in record time.
We worked hand-in-glove with our lenders and servicers to ensure that they are helping our borrowers know, understand, and take advantage of their options. These efforts resulted in more than 1.3 million of our Single-Family borrowers getting needed relief through forbearance plans. For renters, we took steps with our multifamily lenders to prevent evictions from properties that we finance.
We launched our nationwide Here to Help campaign to reach struggling homeowners and renters to make sure they are aware of the resources available to them to stay in their homes. Through December, Here to Help has reached more than 150 million consumers, and approximately 60% of these consumers are from minority, women, or disabled populations.
With our partners in the Disaster Response Network, we’ve helped connect homeowners and renters with federal and local support services. We typically use this network to help consumers respond to natural disasters. Today, we’ve activated these capabilities to help consumers deal with a disaster of a different type, fielding tens of thousands of calls from borrowers and renters in need.
We saw that thousands of homeowners were falling behind on their mortgage payments but weren’t taking advantage of forbearance. So, we increased our educational outreach efforts to help them understand their options. We did the same with lower-income homeowners who could potentially reduce their monthly payments by refinancing but had not yet applied for it.
Our ability to help millions of homeowners and renters hit by the pandemic was not accidental. It was the result of our long partnership with FHFA to reform the company and to incorporate lessons learned from working with homeowners in distress.
The pandemic also presented an historic challenge for the broader market and our mission to provide a stable source of liquidity through all market conditions. In the early stages of the pandemic, when the financial markets were volatile, other sources of mortgage finance quickly stepped back from the market. We did not. Instead, we stepped forward and continued to offer mortgage financing. And that evolved into a record year of mortgage activity resulting in billions of dollars of savings for households.
Altogether we provided more than $1.4 trillion in mortgage liquidity in 2020 as record-low interest rates drove a record demand for mortgage financing. We financed 1.5 million home purchases in 2020, up more than 20% from 2019. We also refinanced 3.4 million loans, up more than 200% from last year, helping homeowners take advantage of historically low interest rates. And we financed 792,000 units of rental housing, with more than 90% of them affordable to families earning at or below 120% of the area median income.
2020 was also the year where our country's deep racial and social inequities came to the fore – inequities that have long affected our most basic need, a roof over our heads.
We are not mere observers here. Our role in housing gives us the ability and responsibility to drive positive change — and we intend to do so. It starts within our company, where we are deeply committed to diversity and inclusion. We do this not only because it's right, but because it helps us better see and serve our diverse communities. We are also committed to working with partners across housing to advance opportunity and tackle racial injustice.
These commitments go to the heart of our charter and who we are.
The gap in minority homeownership is longstanding, and economic downturns such as 2008 and 2020 only make it harder to overcome. While this is a complex challenge that Fannie Mae cannot address on its own, it is our intention to do all we can and to work with our partners in the housing industry to do the same.
All in all, 2020 tested us in unprecedented ways. And I'm proud of how our people came through, helping us serve the market when the market needed us most. And I give special thanks for the support of the FHFA and our Board of Directors throughout this challenging year.
Finally, we began 2021 with Treasury's amendments to the Preferred Stock Purchase Agreement.
I firmly believe that a responsible exit from conservatorship and a recapitalization of Fannie Mae is the best way to support our mission to serve America's housing needs for future generations, while protecting the taxpayer and creating a substantial layer of loss-absorbing capital.
The amended agreement continues us down that path. It allows us to continue to grow our capital through retained earnings and it provides for the possibility of raising private capital. And it creates a potential path to responsibly exit conservatorship when we achieve certain levels of capitalization, while also providing optionality for policymakers on the path forward.
For our part, we recognize that safety and soundness, including a strong capital base, is critical to our future as an independent, mission-driven commercial enterprise.
While we put our mission first, we cannot fulfill that mission through market cycles unless we are safe and sound and properly capitalized, and we cannot be properly capitalized unless we are investable and can attract risk capital from the private sector.
We continue to believe that a Fannie Mae that is reformed, well-regulated, well-capitalized, and out of conservatorship will best serve the needs and interests of our nation’s housing markets and our housing mission. It will help us ensure stability and a steady supply of liquidity through all market cycles.
And, just as importantly, it will help us deliver more dynamic and innovative solutions to expand housing opportunity, address racial disparities, and help manage and mitigate the growing risks from climate change.
To wrap up my remarks, 2020 demonstrated the essential role we play for homeowners, homebuyers, and renters, the housing finance system, and the economy even under the most challenging conditions.
As we go into 2021, the nation is not yet out of the woods and our mission is as critical as ever. We continue to focus on ensuring stability and liquidity in the mortgage market. And, as always, we continue to focus on safety and soundness, including building our capital base and a sustainable and investable enterprise.
With that, I’ll turn it over to Celeste, who will take us through the numbers. And then Celeste and I will be happy to answer any questions you have before wrapping up today’s call. Celeste, take it away.
Celeste Mellet Brown:
Thank you, Hugh. And good morning, everyone.
As Hugh discussed, 2020 was a year of unprecedented challenge for Fannie Mae and the world. The pandemic and our response demonstrated our critical role supporting housing finance across all market and economic conditions.
Even as private mortgage liquidity withdrew when economic uncertainty of the pandemic took hold, we remained a constant and stable source of liquidity. That was particularly evident in our whole loan conduit, which is vital to smaller lenders who are often key sources of housing finance to underserved rural and urban areas. Our conduit volumes more than doubled to nearly $750 billion in 2020, and more broadly, we provided record liquidity to the single-family and multifamily markets.
Perhaps most critically, a decade-plus of work to strengthen our risk management was evident in 2020. Our financial results and the health and resiliency of America’s housing system in the face of the pandemic stands in stark contrast to 2008 when housing was a key driver of the Financial Crisis.
As Hugh mentioned, FHFA and Treasury agreed to amend the Senior Preferred Stock Purchase Agreement, or PSPA. This amendment has many implications for us.
Critically, the amendment suspends the net worth sweep and allows us to build our capital until we achieve adequate capitalization under the new Enterprise Capital framework. This is essential as building substantial GSE equity and capital remains a key unfinished aspect of our transformation under conservatorship.
Additionally, the amendment formally creates a foundation for exiting conservatorship. We believe that recapitalizing and exiting conservatorship is an important goal as it will enhance our safety and soundness, protect the American taxpayer, and, we believe, allow us to be more dynamic and better positioned to meet our mission and the constantly evolving needs of the housing system.
The amendment also introduced some new limits on acquisitions of mortgages with multiple risk layers and the financing of second homes and investor properties, and imposed additional constraints on our multifamily acquisition volume. We are assessing the operational and financial impact of these limits, but we anticipate fully adapting to them as we have to many other changes over the years. The amendment also includes a size limit on the use of the whole loan conduit by originators. While we are still evaluating the impact of this limit, we believe that most of our small lenders, for whom the conduit provides funding, would be unaffected by the new cap. This is particularly important as small lenders are critical to our mission since they support the availability of mortgage finance in underserved areas.
And while the capital we need to exit is significant, the changes we make in response to the PSPA amendment will likely decrease our capital needs over time, as they will reduce the amount of leverage-based and risk-based capital required to support our business.
Let me turn to our results.
Extraordinarily low interest rates and the robust housing market continued into the fourth quarter. Acquisition volumes were at record levels for the quarter, leading to 9% growth in our guaranty book in 2020. Refinancing activity was significant, accounting for 66% of acquisitions in 2020 compared to 42% in 2019. Home prices were strong as well, growing by an estimated 10.5% in 2020, including 3.0% in the fourth quarter when prices are typically flat or down.
We achieved strong financial results against this backdrop. For the fourth quarter, net revenues of $7.2 billion grew 7% from the third quarter. Comprehensive income of $4.6 billion increased by approximately 8% quarter over quarter, reflecting the higher net revenues and $1.4 billion of credit-related income that was partially offset by increases in fair value losses of nearly $900 million and lower investment gains.
Full year net revenues increased 16% to $25.3 billion, as record acquisition volumes drove higher remitted guaranty fee income and accelerated net amortization income. However, full year comprehensive income of $11.8 billion declined 16%, largely due to a shift from $3.5 billion of credit-related income in 2019 to nearly $900 million of credit-related expense in 2020 as a result of the pandemic.
A number of items affected our credit expense in 2020. Most significant was the $2.6 billion credit allowance booked in the first quarter predominantly driven by the expected impact of the pandemic. Subsequently, credit results improved due to strong home price growth and low interest rates. The credit results also benefited from fewer loans entering forbearance versus our initial expectations, along with better outcomes for loans exiting forbearance than we expected at the outset, and a roughly $700 million benefit from the redesignation of re-performing loans prior to sale from the portfolio. As you know, selling non-performing and re-performing loans has been an important part of our credit loss mitigation strategy in recent years.
Now let me turn to our segment results, starting with Single-Family.
In the fourth quarter, Single-Family net income of $3.9 billion increased 4.6% from the third quarter, as higher credit-related income and net revenues were partially offset by higher fair value losses and lower investment gains.
As already discussed, record volumes continued in the fourth quarter and the year. In 2020, Single-Family acquisitions more than doubled to nearly $1.4 trillion and the guaranty book grew by over 8%.
Acquisition growth, particularly from refinancing, drove an 18% increase in Single-Family revenues to $21.9 billion in 2020. However, Single-Family net income declined 16.5%, largely because of the shift from credit income in 2019 to credit expense in 2020 discussed previously, while lower investment gains and higher fair value losses also contributed.
The credit quality of Single-Family’s acquisitions remained strong, helped by the high share of refinance volumes, which typically have better credit profiles. In 2020, acquisition LTVs improved 5 percentage points, 500 basis points, to 71%, and FICO scores increased by 11 points to 760.
The Single-Family serious delinquency rate of 2.87% decreased by 33 basis points from the third quarter, reflecting loans exiting forbearance and becoming current. Excluding loans in COVID-related forbearance, the SDQ rate would have been 66 basis points in the fourth quarter, in line with the third.
Turning to Multifamily, fourth quarter net revenues of just under $1 billion were 19% higher than in the third, while net income grew 36% to over $600 million, reflecting higher revenues and a shift from credit expense in the third quarter to credit income.
Multifamily acquisitions for the year were a record $76 billion, driving nearly 14% guaranty book growth in 2020. Total five-quarter acquisition volume through year end 2020 under FHFA’s $100 billion cap for that period was $94 billion, and we met the cap’s 37.5% minimum requirement for mission-driven housing. FHFA has set the fiscal year 2021 acquisition cap to $70 billion and increased the mission-driven housing requirement to 50%. The PSPA amendment established an additional $80 billion limit on our Multifamily mortgage acquisitions during any 52-week period. While the $70 billion multifamily volume cap remains in effect for 2021, the new $80 billion PSPA limit operates as an independent limit on our future multifamily acquisitions.
Given very strong demand and our “supply” being constrained by the volume cap imposed by the FHFA, we have had to take certain actions to slow our acquisition rate, including raising pricing.
Multifamily's fourth quarter serious delinquency rate fell 14 basis points to 98 basis points from the third as loans exited forbearance and, in most cases, started to reperform. Excluding loans that have received a forbearance, the fourth quarter SDQ rate would have been 3 basis points.
Now let me give an update on COVID-related forbearance.
Our take-up rate expectations remain largely unchanged from the third quarter, with forecasted lifetime COVID-related forbearance of 8.5% for Single-Family and 5% for Multifamily.
In Single-Family, approximately 1.3 million loans, or 7.7% of the Single-Family guaranty book based on loan count, have entered forbearance since the start of the pandemic. By the end of 2020, 60% of these loans had already exited, and with predominantly positive outcomes, with approximately 20% liquidating because borrowers refinanced or sold their homes. Approximately 500,000 loans, or 3.0% of the single-family guaranty book based on loan count, remained in active forbearance at year end. Of these loans, 12% were current.
For Multifamily, over 60% of the $5.3 billion of UPB that has entered forbearance to date has since successfully exited and either reinstated, liquidated or entered a repayment plan. Approximately 40 basis points of Multifamily UPB remained in forbearance at the end of 2020.
As we have previously noted, we continue to accrue interest on most COVID-affected delinquent loans. This interest amounted to $2.8 billion for 2020 and was partially offset by a roughly $200 million credit provision.
Additionally, we advanced $1.2 billion of principal and interest to Fannie Mae trusts in 2020 for past-due loans in forbearance to ensure timely payment to MBS investors.
We are optimistic that a significant portion of loans in COVID forbearance will be resolved successfully, as to date most loans exiting forbearance through a payment deferral or modification have been able to reperform or repay. Nonetheless, there remains some risk, as there is no certainty around how the pandemic and economy may evolve in 2021. For example, FHFA recently announced that some loans may be eligible to remain in forbearance for up to 15 months. The extension will provide borrowers affected by the pandemic more time to get their finances back on track, and we are hopeful that this will result in loans successfully resolving after forbearance. However, there is a risk that loans remaining in forbearance for a longer period of time may decrease the likelihood of a successful outcome.
If a Single-Family loan does not resolve and either remains nonperforming for a prolonged period or enters a flex modification, then we are required to purchase it out of trust. While these purchases were $5.4 billion in 2020, we anticipate they could grow significantly in 2021. At year end, $108 billion of Single-Family UPB was in forbearance, including $81 billion that was 90+ days delinquent. We currently estimate that approximately 30% of loans in forbearance may eventually need to be repurchased. While our credit allowances already reflect expected life of loan losses, any purchases will increase the size of our retained portfolio. We will need to manage the impact of that on our interest rate risk, capital, and retained portfolio cap. While FHFA has directed us to pause our sales of non-performing and re-performing loans through February 28, as they evaluate the requirements that will apply to future loan sales, over time, we may seek to sell portfolios of these loans to mitigate their impact on our risk and balance sheet.
Turning to capital, FHFA recently issued its final capital rule. Compared with the conservatorship capital measures established in 2018, the final rule has higher buffer requirements, countercyclical requirements, risk weight floors, and reduced relief from CRT. All of this will result in a material increase in our capital requirements.
While our net worth at year end was $25.3 billion, the estimated total capital requirement under the new rule would have been approximately $185 billion, including $135 billion in Common Equity Tier 1, or CET1, capital. As I noted before, the amended PSPA offers a path to exiting conservatorship once our CET1 reaches 3% of Adjusted Total Assets, which we estimate would have required CET1 of $124 billion at year end.
The amendment allows us to continue to retain capital and permits our raising external capital in the future if certain conditions are met. We are evaluating how to best meet our capital requirements in a prudent manner.
And a final note on capital, you will recall that we paused our CRT program due to market conditions and to evaluate its costs and benefits. Although CRT provides significantly less relief under the final capital rule, it remains an important tool that can help us manage capital and risk, and we continue to assess the scale and structure of any potential CRT transactions we may issue in the future.
Now let me conclude with some comments on outlook. We expect the economy to rebound in 2021 and forecast 6% annual growth in GDP. We believe economic growth will accelerate significantly starting in the spring, assuming vaccination efforts continue and additional stimulus passes, prompting a recovery in consumer spending.
We also expect strong economic growth to continue to support housing price growth, which we currently forecast at 4.5% in 2021, though we do expect home price growth to slow after 2021. While we do not anticipate rate actions by the Fed this year, there is a chance for mortgage rates to begin to increase if economic growth is as robust as we anticipate.
We expect mortgage originations to remain strong at $3.9 trillion in 2021, but down from the record $4.4 trillion last year. Such activity would fuel continued growth in our guaranty book and in our remitted guaranty fee income. While we expect amortization income to remain high in 2021, we expect it to decline from 2020 as refinance activity will likely begin to slow in the second half of this year.
In terms of credit, a continuation of the strong housing market and an expected economic recovery in 2021 would be positive factors. However, much uncertainty remains as new COVID variants appear, and it is difficult to forecast the success of the vaccine rollout and the effectiveness of fiscal intervention in addressing economic strains relating to the pandemic. The outlook for credit in 2021 will continue to depend largely on the pandemic’s impact on the economy and housing.
I also want to note that we just adopted hedge accounting, which will reduce reported earnings volatility related to interest rate exposure, although we will continue to have exposure to spreads. We will discuss the impact of hedge accounting in future quarters since it will begin to affect year-over-year earnings comparisons in the first quarter.
Let me conclude by noting the obvious: 2020 was a unique and challenging year.
The economic impact of the pandemic underscored the importance of safety and stability in the housing market. A decade of hard work by the GSEs and FHFA made the resiliency of America’s housing market today possible. We understand our role in managing risk in housing finance: to implement critical government housing policy like COVID relief, to be a constant and steady source of liquidity to the housing market, and to support affordable mortgage financing. We take these responsibilities seriously and 2020 was a real test of our abilities. We are proud of our efforts to help America’s homeowners and renters.
We are also excited about the changes that the new PSPA amendment will allow.
And with that, I’ll turn things back to Hugh.
Hugh R. Frater:
Well, thank you everyone for listening, and we look forward to seeing you next time. Thanks a lot.
Fannie Mae's February 12, 2021 media call includes forward-looking statements, including statements relating to: the impact of the COVID-19 pandemic on the company’s business and financial results; economic and housing market conditions; the impact of the company’s capital requirements; the impact of amendments to the Preferred Stock Purchase Agreement on the company's business and financial results; the company’s business plans and strategies; its loss mitigation activities and their outcomes; and the credit quality and performance of its book. Actual results and events, and future projections, may turn out to be very different from these statements. Factors that may lead to different results are discussed in “Risk Factors,” “Forward-Looking Statements,” and elsewhere in the company's Annual Report on Form 10-K for the year ended December 31, 2020. The company's forward-looking statements speak only as of the date they are made, and the company undertakes no obligation to update any forward-looking statement as a result of new information, future events or otherwise, except as required under the federal securities laws.