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Fannie Mae First Quarter 2021 Earnings Media Call Remarks

April 30, 2021
Adapted from Comments Delivered by Hugh R. Frater, Chief Executive Officer, and Celeste Mellet Brown, Executive Vice President and Chief Financial Officer, Fannie Mae, Washington, DC

Hugh R. Frater:

Good morning, and thank you for joining us to discuss our 2021 first quarter results.

This morning I will discuss some key themes for Fannie Mae as we move through this important year. Then, I’ll hand it over to Celeste to discuss our results in depth.

And we’ll leave time at the end to take your questions.

Thoughts on 2021

As I reflect on where we are, two things are clear.

First, while this spring has brought hope on the public health front, the fact remains that the COVID-19 pandemic is still with us.

The effects on families and our economy will be with us for some time.

And they will present both challenges and opportunities for homeowners and renters.

That’s why our priorities in 2021 are to continue doing all we can to help borrowers and renters meet those challenges and opportunities; and, to continue supporting our own employees through these uncertain times.

The second item that is clear is that our first quarter results demonstrate Fannie Mae’s ability to simultaneously deliver on our mission, generate reasonable returns, and focus on safety and soundness, including rebuilding our capital base.

As I’ve said many times, these factors may sometimes be in tension but in my view, they are not necessarily in conflict. In fact, I believe they complement one another. 

Our mission is to provide liquidity and stability and to promote access and affordability.

To fulfill this mission, we need to be safe and sound – to be safe and sound, we must be properly capitalized. And to attract capital over time, we must be investible and generate a reasonable return for our shareholders.

The quarter

In the first quarter, we by and large achieved this vital balance. And we will continue to pursue that balance going forward.

We earned $5 billion of net income in the first quarter. We provided $422 billion for mortgages that helped people across America refinance a home, purchase a home, or finance rental property – this last quarter was the second biggest nominal volume quarter in our history. And we increased our net worth by $5 billion – to $30.2 billion. This represents progress in rebuilding our capital base, which is key to our future.

However, there is one important caveat – given the continued surge in volume, our net worth to asset ratio barely moved. And, as Celeste will explain, our capital requirement actually increased this quarter.

In my view, this undercapitalization is unsustainable, and it exposes the taxpayer and the housing finance system to risk.

Looking ahead

I want to close by reiterating a few themes I hit on in February. These themes will remain central to Fannie Mae’s story this year and for some time.

Fannie Mae and our partners throughout housing know that building a housing system that is more affordable, fairer, and more resilient is a long-term project. Our housing system has gaps – racial gaps, access gaps, supply gaps – that must be bridged. We want to be a part of building that bridge.

The housing market has for much of the past decade served many middle- and upper-middle class homeowners and apartment owners very, very well. But, in many communities, the supply of housing for moderate- and low-income families is at crisis levels. That’s why we are putting Fannie Mae’s mission first, with a focus on how we can improve the housing system to better serve borrowers and renters.

That means all borrowers and renters, including people who have historically been left behind by our housing system, such as Black people and other people of color.

The housing and mortgage markets have stood up very well to the shock of the pandemic. Yet the pandemic has also highlighted the ways in which our housing finance system continues to fail many of our working families. Serving these families better will require a change from today’s status quo. 

We cannot just accept things the way they are – not us, not the mortgage industry, not the home builders, not the realtors, not the apartment owners – not any of the stakeholders in this vast ecosystem that has performed so well economically in the past year.

We welcome, for example, this week’s announcement by FHFA of RefiNow™, a new refinance option to make it easier for qualifying low-income borrowers to reduce their housing costs. This is just one small step and we hope our partners in industry will embrace the challenge.

The past year has shown that we have the capacity, the talent, and the tools to help imagine steps like this and make them succeed, and that with the right partnerships and tools we can build a better housing system. 

Today, we are serving homeowners and renters with this goal in mind, and we are prepared to do more tomorrow and then more the day after that.

I’ll turn it over to Celeste now, who will take us through the numbers. Celeste, take it away.

Celeste Mellet Brown:

Thanks Hugh, and good morning.

Before I speak to our financials, I will take a moment to reflect on the first quarter.

On one hand, we rapidly implemented programs that provided much-needed relief to homeowners and renters who were adversely – in some cases severely – impacted by the pandemic, allowing them to stay in their homes. On the other hand, we handled record volumes of mortgage prepayments and new acquisitions as borrowers took advantage of low interest rates and a booming housing market. 

These contrasting circumstances of the pandemic for borrowers and renters underscore our role in supporting America’s mortgage markets in good times and bad – and what often goes unremarked upon is how little disruption there has been to the mortgage market despite these stresses and strains. This reflects the seriousness with which we take our Charter responsibilities and the skill and excellence of the people at Fannie Mae, whose hard work and diligence has made it possible for America’s homeowners and renters to purchase, refinance, rent, or get real, urgent financial relief during one of the most challenging periods in our lifetimes. 

Overall results

Let me turn to our financial results. It was another good quarter for Fannie Mae. The housing market remained robust in the first quarter, with an unseasonably strong 3.4% increase in home prices amid continued low interest rates. First quarter mortgage acquisitions of $422 billion, the second-highest level in our history, was down 7% from the record fourth quarter. The guaranty book grew 2.4% to $3.8 trillion. While purchase volumes declined due to seasonal reasons, refinancing activity remained near fourth quarter’s record levels. Refinancing was 75% of first quarter single-family acquisitions compared to 71% in the fourth quarter and 64% a year earlier.

First quarter net revenues of $6.8 billion declined 6% from $7.2 billion in the fourth quarter, largely due to lower amortization income. However, despite these lower revenues, comprehensive income of $5.0 billion increased by approximately 9% from last quarter, largely as a result of fair value losses in the fourth quarter shifting to gains this quarter, partially offset by lower credit income. The shift from fair value losses to gains resulted largely from the implementation of hedge accounting in January.

This benefit from hedge accounting arose because it allows us to better match the timing of accounting gains and losses from our derivative hedges with the underlying economics of the loans or funding debt we are hedging. Before hedge accounting, we reported the fair value of the derivatives used to hedge interest rate risk in fair value gains and losses. Now, we net these derivative hedges with the fair value gains or losses of the loans or funding debt they are hedging and report them in net interest income. Hedge accounting improved first quarter pretax income by approximately $1.2 billion. Although hedge accounting reduces the earnings volatility related to interest rate movements in any given period, it does not impact the amount of interest-rate-driven gains or losses we will ultimately recognize through our earnings over time.

Credit was also a significant driver in the quarter. We had $770 million in credit-related income in the first quarter, compared to $1.4 billion in the fourth [quarter]. Above-average home price growth and a doubling of our full-year 2021 home price growth forecast were the primary factors in the reduced credit allowance. That was partially offset by the impact of higher actual and projected interest rates.


Now let me turn to our segments.

First quarter single-family net income of $4.4 billion increased approximately 11% quarter over quarter, as lower credit-related income and a 5% decline in net revenues from lower amortization income was more than offset by a shift from fair value losses to gains, as described previously.

Single-Family’s average conventional guaranty book grew by 2.4% from the fourth quarter to $3.2 trillion. First-quarter acquisitions declined $25 billion to $400 billion, driven largely by a seasonal decrease in purchase acquisitions. However, refinance volume of $301 billion in the first quarter remained unchanged from the fourth.

You will recall that certain restrictions on our single-family acquisitions were included in the January amendment to our senior preferred stock purchase agreement. So far, these have had minimal impact on acquisitions, but we continue to work on implementation of the new restrictions.

First quarter average charged fees on single-family acquisitions, net of TCCA, grew 2.2 basis points from the fourth quarter to 48.0 basis points. This increase reflected our implementation of the adverse market refinance fee in December.

The credit quality of Single-Family’s acquisitions remained strong, helped by the high share of refinance volumes that typically have better credit profiles. First quarter loan-to-value ratio, or LTV ratio, on refinance acquisitions of 63% was the lowest since 2011. Total first quarter weighted-average acquisition LTV ratio improved by 2 percentage points from the fourth quarter to 68%, while the weighted-average FICO score decreased by one point to 761.

The single-family serious delinquency rate was 2.58% in the first quarter, down from 2.87% last quarter, due to the ongoing economic recovery and the decline in the number of the company’s single-family loans in COVID-19-related forbearance plans. Excluding loans in COVID-related forbearance, the SDQ rate would have been 66 basis points in this quarter, flat with fourth.


Turning to Multifamily, first quarter net revenues of $873 million fell 9% from the fourth quarter, due to lower net interest income, which drove a 4% net income decline to $599 million.

I mentioned last quarter that given strong demand we have taken certain actions, including raising prices, to manage our pipeline and remain under the FHFA’s acquisition cap. As a result, the average charged guaranty fee on our multifamily book of business increased to 76 basis points.

Multifamily's first quarter serious delinquency rate fell 32 basis points to 66 basis points from the fourth quarter and from a peak of 125 basis points in July. The improvement reflects loans exiting forbearance that are performing under repayment plans or were reinstated through either becoming current or through modification. Excluding loans in forbearance, the first quarter multifamily SDQ rate would have been 3 basis points, consistent with last quarter.


Now let me give a brief update on COVID-related forbearance.

The FHFA extended the single-family COVID-19 forbearance to a maximum of 18 months. While we are optimistic that a significant number of loans in COVID forbearance will be resolved successfully, there remains some risk.

In Single-Family, approximately 1.3 million loans, or 7.9% of the guaranty book based on loan count, have entered forbearance since the start of the pandemic. We now forecast that our lifetime take-up rate will increase an additional 20 basis points to 8.1%, down from our 8.5% expectation last quarter. By the end of the first quarter, 68% of loans that had been in forbearance have exited with predominantly positive outcomes. Approximately 400,000 loans, or 2.5% of the single-family guaranty book based on loan count, remained in active forbearance at the end of the first quarter. Of these loans, about 10% were current.

For Multifamily, approximately 1.3% of the current guaranty book based on UPB had entered a forbearance agreement since the start of the pandemic. As a result of continued low take-up rates and further economic stimulus, we have reduced our forecast of the lifetime multifamily loan forbearance take-up rate to 2%, down from 5% in the fourth quarter. Over 70% of the $5.4 billion of UPB of multifamily loans that have entered forbearance to date have since successfully exited and either reinstated, liquidated, or entered a repayment plan. Only 23 basis points of the multifamily guaranty book remained in active forbearance at the end of the first quarter.

As we have previously noted, we accrue interest on COVID-affected delinquent loans when we have reasonable assurance of being able to collect. Our evaluation of whether collection is reasonably assured considers the probability of default, the current value of the collateral, and any proceeds that are expected from contractually attached mortgage insurance. As of March 31, we have accrued $1.8 billion of interest on past-due loans in forbearance outstanding, against which we have recognized a $185 million credit provision.

Another impact of COVID forbearance in the first quarter was our advancing $622 million of single-family principal and interest, primarily related to past-due loans in forbearance, to ensure timely payment to MBS investors.

Looking forward, if a single-family loan does not resolve, and either remains nonperforming for a prolonged period or enters a flex modification, then we are generally required to purchase it out of trust. At quarter-end, $88 billion of single-family UPB was in forbearance, including $70 billion that was 90+ days delinquent. We currently expect that some loans in forbearance at the end of the first quarter may eventually need to be purchased out of trust, mostly in 2022. While we do not expect these purchases to have a material impact on our financials, largely because our credit allowance already reflects expected lifetime losses for these loans, these purchases will be added to our retained portfolio.


Our net worth at quarter-end was $30.2 billion, an increase of $5 billion from the fourth quarter. Our estimated total capital requirement under the new Enterprise Regulatory Capital Rule would have been approximately $190 billion, of which approximately $140 billion would need to be in Common Equity Tier 1, or CET1, capital. Regulatory buffers represent approximately $75 billion of these requirements. Our estimated capital requirement grew by about $5 billion quarter over quarter as a result of book growth and a reduction of benefits from credit risk transfer transactions.

We are permitted to retain earnings for the foreseeable future under the terms of the most recent senior preferred stock purchase agreement amendment, and we continue to evaluate how to best meet our capital requirements in a timely and prudent manner.


Looking at the year ahead, we continue to expect strong real gross domestic product (GDP) and employment growth as the pace of vaccination programs improves and many COVID-related restrictions are being lifted. Additionally, we anticipate the recently passed stimulus bill and the continued build-up of household savings will support greater consumer spending levels.  

Nonetheless, economic risks and uncertainty remain. The possibility of new COVID variants emerging, the extent of consumer willingness to return fully to pre-pandemic economic activity, the impact of potential supply chain disruptions, and the pace of future inflation all represent risk to our outlook. 

Home sales were minimally affected by rising mortgage rates through the first quarter, though a further jump in interest rates is a risk. We expect ongoing tight housing supply to drive strong home price growth of nearly 9% this year, but the lack of for-sale inventory could remain a headwind for home sales. 

While we project mortgage purchase originations to increase by about 15% to $1.9 trillion in 2021, we expect total originations to decline by around 12% to $4 trillion, as we expect refinance demand to decline.

We expect lower refinance volumes will affect our financial results as fewer loan prepayments will lead to lower amortization income. Record refinancing volume has driven significant growth in amortization income in the last year. In the first quarter, net amortization was $2.5 billion compared to $1.5 billion in the first quarter of 2020. This growth in net amortization occurs as mortgage prepayments accelerate the recognition of revenues that would otherwise have been amortized into our income statement over the contractual life of the mortgage. As I noted, 75% of our single-family acquisitions in the first quarter and about two-thirds of our 2020 acquisitions were refinances. By comparison, refinances typically accounted for closer to 40% of acquisitions in 2017 to 2019. We believe that refinance volume will remain elevated through the first half of 2021, but thereafter will begin to decline as refinancing returns to more normalized levels.

Fannie Mae's April 30, 2021 media call includes forward-looking statements, including statements relating to: the company's business and financial results; its loss mitigation activities (including COVID-19-related forbearances) and their outcomes; and economic and housing market conditions. 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 Quarterly Report on Form 10-Q for the quarter ended March 31, 2021, and its 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.