Second Quarter 2017 Earnings Media Call Remarks Adapted from Comments Delivered by Timothy J. Mayopoulos
Good morning. Thank you for joining us. Let me start with an overview of our second quarter 2017 financial results and the drivers of those results.
We reported net income of $3.2 billion and comprehensive income of $3.1 billion. These compare with $2.8 billion of both net income and comprehensive income in the first quarter of this year. The main drivers of the change in net income were an increase in credit-related income, as well as a shift to investment gains from investment losses. These were partially offset by higher fair value losses on the derivatives that we use to manage risk from interest rate changes. Detailed information regarding the drivers of our results can be found in our press release and quarterly report on Form 10Q, which we filed today.
Our second quarter results reflect another strong quarter in our Single-Family and Multifamily businesses. We provided approximately $135 billion in liquidity to the mortgage market in the second quarter through our guarantees and loan purchases. This supported approximately 316,000 home purchases, 222,000 home refinances, and financing for approximately 162,000 multifamily housing units.
We remained the largest provider of mortgage market liquidity in the quarter, as well the largest issuer of mortgage-related securities. Our Multifamily business volume in the first half of the year was a robust $30.6 billion. And, we continued to lead the market in multifamily Green Financing, with $10.8 billion in production through the first half of 2017.
We also continued to improve our serious delinquency rate in our Single-Family business, which has dropped for 29 straight quarters to 1.01% as of the end of June.
We will pay Treasury another $3.1 billion dividend in September 2017 if FHFA declares a dividend in this amount. This would bring our total dividend payments to Treasury to $165.8 billion. For more information on our dividend payments, I encourage you to read the relevant disclosures in today’s Form 10-Q.
We also expect to remain profitable on an annual basis for the foreseeable future. However, as we have discussed in the past, fluctuations in factors beyond our control, such as interest rates and home prices, make our quarterly results potentially volatile. These factors, combined with our dwindling capital cushion, could require further draws from Treasury in the event of a quarterly loss.
In addition, as we describe in our filing, a significant reduction in the corporate tax rate would require us to record a substantial reduction in the value of our deferred tax assets. We expect this would result in a significant net loss and net worth deficit for the quarter in which the reduction is enacted, and could potentially result in a net loss for that year.
Let me provide an update on our important work to serve our customers and the housing finance system.
First, for all practical purposes, we have completed Fannie Mae’s change to a company whose income is driven largely by our guaranty business, instead of our investment portfolio. Our guaranty business accounted for more than 75 percent of our net interest income in the first half of 2017. This shift represents a significant change in our business model, one that makes the company stronger.
Second, the maturation of our credit risk transfer capabilities represents another positive shift for our business. In our credit risk transfer transactions, we transfer a portion of the mortgage credit risk on our loans, in effect paying for credit risk protection where appropriate. The unpaid principal balance of loans covered by a credit risk transfer deal, measured as of the time of the deal, has now passed the $1 trillion mark.
This quarter, GlobalCapital, an international financial trade publication, recognized our expertise in this area with the “Best Overall Issuer” award, based on a vote by our peers and investors. We have also announced plans for an innovative new kind of security so that more types of investors can participate, such as real estate investment trusts and foreign investors.
The expansion of our credit risk transfer capabilities continues our change from being a company that buys and holds credit risk to one that also intelligently syndicates and distributes risk to private capital. With the growth of this new market, private capital plays a bigger role, taxpayers bear less risk, and, with a broader investor base, housing finance is more resilient.
Third, we are putting our customers at the center of everything we do so that they can better serve their customers: the individuals and families looking to buy and rent homes. Our customer-centric approach means that we look at every move we make through the lens of our lenders, servicers, investors, and taxpayers. We are actively listening to our customers so that we can better understand their pain points and address them. We are working with our customers every day on innovations that will allow them to provide a better, safer, and more efficient experience.
I have spoken on previous calls about recent innovations, such as our Day 1 Certainty initiative, our work in multifamily Green Financing, and our student debt initiatives. All that work is continuing to build momentum. But those are just examples of a broader focus on innovation that is permeating our company. This sharper focus on innovation has us looking at new ways to encourage sustainable lending, for example. We are testing new innovations and evaluating how we can extend credit in prudent ways, in light of the economic environment. Our focus on innovation is leading us to test how we can best serve changing housing markets, such as the single-family rental market. We are also exploring new technology partnerships that hold the potential to improve the mortgage process and make the entire mortgage system better for borrowers, lenders, and investors.
We are still early in this journey. In the coming months, you can expect that Fannie Mae will be testing a number of new ideas with small pilot projects. We will carefully measure and monitor these pilots, and we will use the results to improve ideas that are promising, scale ideas that work, and discontinue ones that do not. These pilots do not represent a change in Fannie Mae’s risk appetite. As we innovate, we will operate in a safe and sound way to protect taxpayers. But these pilots do represent a change in our willingness to think, act, and partner in different ways so we can meet the challenges of today’s and tomorrow’s market. And, like the changes to our business model, they are a tangible expression of our fundamental commitment to provide liquidity, in all markets and at all times.
In summary, we had a strong quarter backed by strong business fundamentals in our guaranty business.
Our improved business model is making our company and housing finance more resilient and durable.
We are committed to continuing to deliver value to our customers. And we will continue to innovate so that we can make our company and the system stronger, and find new ways to safely and sustainably create housing opportunities that are affordable to more Americans.
With that, I am happy to open it up for your questions.