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Fannie Mae Second Quarter 2021 Earnings Media Call Remarks

August 3, 2021
Adapted from Comments Delivered by Hugh R. Frater, Chief Executive Officer, and David Benson, President and Interim Chief Financial Officer, Fannie Mae, Washington, DC


Good day, and welcome to the Fannie Mae Second Quarter 2021 Results Conference Call. At this time, I will now turn it over to your host, Pete Bakel, Fannie Mae’s Director of External Communications.

Pete Bakel:

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's second quarter 2021 financial results.

Please note this call may include forward-looking statements, including statements related to the company's business, its plans, financial results, and loss mitigation activities; as well as economic and housing market conditions.

Future events may turn out to be very different from these statements.

The "Risk Factors" and "Forward-Looking Statements" sections in the company’s second quarter 2021 Form 10-Q, filed today, and its 2020 Form 10-K, filed February 12, 2021, describe factors that may lead to different results.

A recording of this call may be posted on the company's website.

We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.

I'd now like to turn the call over to Fannie Mae Chief Executive Officer, Hugh R. Frater, and Fannie Mae President and Interim Chief Financial Officer, David Benson.

Hugh R. Frater:

Thanks, Pete. Good morning and thank you for joining us as we discuss our 2021 second quarter results.

I will open with some key themes for Fannie Mae as we mark the halfway point of 2021. Then, I'll hand it over to David Benson, our President and Interim Chief Financial Officer, to discuss our results in more depth.

Focus on 2021 Priorities

In the second quarter, Fannie Mae maintained its steady focus on our 2021 priorities.

First, we've continued to help homeowners, renters, and the broader market navigate through the pandemic.

As the last few weeks have shown, COVID-19 is still with us.

On the national level, our economy is recovering strongly.

But the pandemic continues to cast uncertainty over the economy, and it continues to have devastating effects for some communities.

Against this backdrop – and consistent with our mission – we are continuing to help homeowners and renters looking for housing options that are affordable and sustainable. In the second quarter, we provided $384 billion in financing to help people purchase, refinance, and rent homes.

And we continue to help those struggling economically due to COVID understand their options through the Here to Help resources on our Fannie Mae website, especially with the end of the foreclosure and eviction moratoria.

Second, we continue to make it a priority to support our employees.

Underpinning our strong second quarter results are the efforts of our people, and I am very grateful for their dedication.

Motivated by our housing mission, they continue to deliver extraordinary work under challenging circumstances.

As progress on the pandemic continues, we will continue to engage with our employees to develop a new, flexible, hybrid model for work at Fannie Mae.

Third, this quarter again demonstrated our ability to advance our mission, operate safely and soundly, and grow our capital.

In the second quarter, we reported $7.2 billion in net income and increased our net worth to $37.3 billion.

We remain significantly undercapitalized. But these results are further evidence that our mission, safety and soundness, and capital building do not conflict with one another – in fact, they complement one another.

Looking Ahead

As we move into the second half of the year, we will continue to focus on these priorities.

We also look forward to building a strong, collaborative relationship with Acting FHFA Director Sandra Thompson and her leadership team.

She and her team are already demonstrating a predilection for both thoughtfulness and action, as they reevaluate a wide range of important issues.

Many people at Fannie Mae have worked with Acting Director Thompson over the years.

In addition to being a strong, professional regulator, we know her to be deeply committed to safety and soundness and to the mission of the housing enterprises.

Shortly after being sworn in, the Acting Director stated that "broad, fair access [to credit] and stability for financial institutions work together as pillars of the nation’s housing finance system."

Fannie Mae shares this conviction.

We also share her understanding that, in her words, "there is a widespread lack of affordable housing and access to credit, problems that are especially concentrated in communities of color."

Her words recognize that today's housing system has gaps that must be bridged – and that the forces of the pandemic are making some of these gaps wider.

We know, for example, that in 2019, before the pandemic, 21% of owner households and 47% of renter households were cost-burdened, spending 30% or more of their income on housing costs.

Since 2019, we estimate that home prices have grown by 23% through June 2021. Meanwhile, income has grown by only 9%, including government benefits and transfer payments.

Just over two weeks ago, the National Low-Income Housing Coalition reported that a full-time worker must now earn more than $20 per hour to rent a modest one-bedroom home and almost $25 per hour to rent a two-bedroom home.

As HUD Secretary Fudge highlighted in the preface to the report, these wages – and therefore these homes – are beyond the reach of too many Americans.

So, despite the topline numbers for the economy, housing, and Fannie Mae, we recognize that the housing market we serve is not serving the needs of everyone.

We need to change that. Actions both large and small are needed to move housing in the right direction.

One small step we took this quarter was to launch RefiNow, a new option that makes it easier for qualifying lower income homeowners to refinance and reduce their housing costs. RefiNow has been in the market for less than two months, but we are seeing good application volume and acquisitions are starting to flow through.

On a related note, I also invite you to read our recently issued third annual Green Bond Impact Report, which provides more transparency into our work to become a leading Environmental, Social, and Governance company.

This year's report, for the first time, includes information on our Single-Family Green Financing work.

Fannie Mae is proud to be the largest cumulative issuer of green bonds in the world. Since 2012, our Green Financing work has helped prevent an estimated 634,000 metric tons of CO2 equivalent. That roughly translates to removing 137,000 passenger cars from the road.

Building a housing finance system that is more affordable, fairer, and more resilient, one that is equal to today's great housing challenges, is a long-term project.

Every move we make in that project will be made responsibly, with sustainability, safety and soundness, and the long-term interests of homeowners, renters, and our business in mind.

But that thoughtfulness must be paired with urgency, because the need for a better, fairer housing system is urgent.

With that, I'll turn it over to Dave Benson, who will take us through the numbers.

Over to you, Dave.

David Benson:

Introductory Remarks and Overall Financial Results

Thank you, Hugh.

We're now more than 15 months into the COVID-19 global pandemic and the overall economy is recovering more strongly than we, and many others, anticipated a year ago.

To say that the second quarter was "interesting" is an understatement.

GDP grew at 6.5% in second quarter, compared with the slightly over 2% trend that we've seen in recent years.

Home price appreciation was historically robust, driven by housing demand fueled by continued low interest rates and economic stimulus interacting with low levels of housing supply relative to demand.

Q2 home prices increased approximately 6.3%, resulting in first half 2021 home price growth of 10.5%, which is the highest six-month home price growth rate in the history of the Fannie Mae national home price index.

Both refinance and purchase markets remained vigorous, thanks in part to sustained low interest rates.

These factors drove $7.2 billion in net income for the quarter, the highest since the third quarter of 2013, and $8.4 billion in net revenues, the highest since the first quarter of 2014.

As a result, our net worth increased to $37.3 billion, improving our safety and soundness as well as our ability to deliver on our mission, and reducing the risk of a draw on the Senior Preferred Stock Purchase Agreement with Treasury.

Now that said, we remain undercapitalized, as Hugh noted.

I'd like to transition now to the largest contributors to our second quarter results: credit-related income and net interest income, both of which increased quarter over quarter.

Credit-related income increased approximately $1.8 billion from the first quarter, resulting in credit income in the second quarter of approximately $2.5 billion mainly due to: strong actual and forecasted home price growth, which reduced our loss allowance by $1.1 billion; a redesignation of loans from held-for-investment to held-for-sale to support loan sales of higher risk loans, which contributed $678 million in gains; and a continued improvement in our outlook regarding the impact of COVID-driven uncertainties, which resulted in approximately $233 million of benefit in the second quarter.

Net interest income increased $1.5 billion in the second quarter of 2021 compared with the first quarter of 2021, driven primarily by an increase in net amortization income, particularly in the beginning of the second quarter.

Single-family mortgage loan prepayment activity slowed throughout the second quarter of 2021 compared to the first quarter of 2021. However, refinancing activity, while down from the first quarter levels, remained strong due to the continued low interest rate environment, where the 30-year, fixed-rate mortgage hovered around 3% for much of the quarter.

We also experienced a $1.2 billion shift from fair value gains in the first quarter to fair value losses in the second quarter, driven by a decrease in Treasury yields, which drove losses on commitments to sell securities and fair value debt as prices rose.

Now, as I mentioned at the top, this quarter's results were against the backdrop of a strong economy, continued low interest rates, and a surge in home price growth.

Single-Family Results

So now let me turn now to our business segment results.

In our Single-Family business, net income was $6.5 billion and net revenues were $7.4 billion, both of which increased quarter over quarter, impacted by the same factors driving our enterprise results.

Second quarter Single-Family total acquisitions remained strong at $373.3 billion, down slightly from the heights we have seen over the past couple of quarters.

We experienced a decrease in refinance acquisitions in the second quarter, with record purchase mortgage volume of $129.5 billion, nearly 50% of which were for first-time homebuyers.

Now remarkably, over half of our Single-Family guaranty book of business has been originated in the last 18 months, given the low interest rate environment.

Credit characteristics of the Single-Family conventional guaranty book of business remained strong, with a weighted-average mark-to-market loan-to-value ratio of 55% and a weighted-average FICO credit score of 752.

Our Single-Family serious delinquency rate, or SDQ rate, at quarter end was 2.08%, down 50 basis points from March 31. This decline demonstrates the strength of the economy and household income support from past stimulus bills.

It also illustrates the success of the workout options we are offering to borrowers in forbearance due to COVID.

Now excluding loans in forbearance, our Single-Family SDQ rate declined slightly quarter over quarter, from 66 basis points to 64 basis points.

Now I would note that we provide several cuts of both our acquisition and full book data in our quarterly financial supplement, published on our website in conjunction with today's 10-Q filing.

Multifamily Results

Now in our Multifamily business, net income was $645 million and net revenues were $986 million, both up quarter over quarter, driven by a continued increase in guaranty fee revenue on a growing book of business and strong pricing on new acquisitions.

Acquisitions in the first half of 2021 of $32 billion were relatively flat compared to the first half of 2020.

Given the $70 billion cap that the FHFA established on new multifamily business volume for the year, this leaves approximately $38 billion of capacity for the second half of 2021.

Quarter over quarter, acquisitions declined from $21.5 billion to $10.9 billion based on two primary drivers.

First, market competition returned in earnest during Q1 as COVID impacts began to normalize, reducing our volume in the second quarter. As a consequence, our market share returned to more typical levels.

Second, we reduced our second quarter acquisition pace in order to manage to our volume cap.

Now our Multifamily SDQ rate was 53 basis points as of June 30, down from 66 basis points as of March 31. This decline is driven by loans that were in forbearance and have since completed repayment plans or otherwise reinstated.

Our Multifamily SDQ rate excluding COVID forbearance was 3 basis points, unchanged compared to the end of the first quarter, representing continued strength of the credit profile of our book of business.

COVID Forbearance

Now turning to impacts from the COVID pandemic, new loans entering forbearance continued to slow during the second quarter as the economy and labor markets recover.

For our Single-Family loans, our lifetime take-up rate forecast of 8.1%, based on loan count, is unchanged since last quarter. Notably, over 8% of our book by loan count entered COVID forbearance and we expect very few additions going forward. As of June 30, 1.8% of our Single-Family book remained in forbearance.

Of borrowers who have exited COVID forbearance, as of June 30, 31% prepaid their loans; nearly 31% never missed a payment or reinstated their loans, which means they paid their missed payments in a lump sum; and nearly 31% of borrowers entered into COVID payment deferral, a Fannie Mae program in which forborne payments are deferred into a non-interest-bearing balance, due and payable at maturity of the loan or earlier payoff.

Encouragingly, as of June 30, 96% of loans in COVID payment deferral were current.

Now as we approach the pandemic's 18-month mark and reach forbearance extension limits, we may see more borrowers who have not resolved their hardship move into loan modifications. These include the Flex Modification for COVID, to which we recently announced changes that provide an interest rate reduction for all borrowers, regardless of their mark-to-market loan-to-value ratios.

The moratorium on single-family foreclosures put in place last year as a result of COVID expired on July 31 of this year. However, beginning August 1st, our servicers were required to comply with the CFPB's final rule on federal mortgage servicing regulations, which was announced in June and precludes the initiation of certain foreclosures through year-end. As such, we expect foreclosure volumes to be limited throughout the rest of this year.

In Multifamily, our lifetime forbearance take-up rate forecast of 2%, based on unpaid principal balance, is also unchanged since last quarter.

1.6% of the March 2020 Multifamily book has entered forbearance so far, with no new loans entering forbearance in the second quarter.

Over 70% of the active loans that entered forbearance exited through repayment plans or reinstated with approximately 7% defaulting on their forbearance agreements.

Only 0.2% of our Multifamily book remains in active forbearance.


Finally, let me share some thoughts on the economy.

While the initial surge in growth driven by the reopening of the economy has passed, we expect continued economic strength throughout 2021, although significant risks to the outlook remain, including risks relating to labor shortages, supply chain disruptions, the potential for higher inflation, and the impact of the Delta variant in the U.S. and abroad.

We have revised our home price growth estimates for 2021 from 8.8% to 14.8% based on strong price momentum and a continued expectation of tight supply. We expect home price growth to moderate through the remainder of the year and into 2022 as the demand and supply dynamic begins to normalize.

We also expect total 2021 single-family market originations to decline somewhat relative to the prior year, and the mix of originations is expected to shift. In 2021, we expect purchase originations to increase 11% relative to 2020, to a total of $1.8 trillion, driven by higher home sales and strong home price growth as the market recovers from the pandemic. For the second half of this year, we expect refinances to fall due to a modest expected rise in interest rates, which will likely drive fewer loan prepayments and lower amortization income than the first half of this year.

Now in Multifamily, our outlook for the remainder of the year has improved. We expect the volatility in rent growth stemming from pent up demand to last through the summer and begin to normalize in early autumn as local economies further stabilize, although we continue to be cautious given the risks to the outlook mentioned above. While the federal eviction moratorium has now expired and the outcome of the expiration is unknown, the recent increases in job growth and wage growth support a more optimistic outlook for rental payments.

In 2021, we expect multifamily market originations to increase to between $315 billion and $325 billion driven by continued market recovery from the pandemic.

So with that, let me turn it back to you, Hugh.

Hugh R. Frater:

Thank you, Dave, and thanks to all of you for listening.