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Fannie Mae Third Quarter 2021 Earnings Media Call Remarks

October 29, 2021
Adapted from Comments Delivered by Hugh R. Frater, Chief Executive Officer, and David Benson, President and Interim Chief Financial Officer, Fannie Mae, Washington, D.C.

Fannie Mae Moderator:

Good day and welcome to the Fannie Mae Third 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 third quarter 2021 financial results.

Please note this call may include forward-looking statements, including statements related to the company’s business plans and strategies, and the impact of those plans and strategies; the company's 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 third 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 We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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:

Good morning, and welcome. Thank you for joining us to review our third-quarter performance. Our results reflect the strengths of our business model – and also some market-based factors specific to this quarter, such as strong home price growth and low interest rates. Dave will cover those results in a moment.

Before he does, I want to focus on the themes that are driving our mission-first thinking here at Fannie Mae, as well as some important third-quarter initiatives. There is commitment up, down, and across our company to advance equitable and sustainable access to homeownership and quality affordable rental housing. It’s a commitment rooted in our mission, and also in the profound inequities and shortcomings of today’s housing market.

It’s why we recently made a groundbreaking change to Desktop Underwriter to consider positive rental payment history for eligible borrowers. A solid track record of consistent rent payments has rarely been included on credit reports, limiting the ability to use rent payments when assessing the creditworthiness of a first-time mortgage applicant.

We believe this change will increase opportunities for homeownership for the approximately 20% of the U.S. population who have little to no established credit history – even though they may have a history of making on-time rental payments. Simply put, we see it as a new way to safely and soundly identify qualified first-time homebuyers who have historically been excluded from mortgage credit, especially people of color.

The second example: Refi Now. Racial and income disparities in refinance take-up rates have persisted for far too long. So, working with FHFA, we created a refinance loan for low-income borrowers that allows them and their lenders to refinance a mortgage at a lower rate. We are very pleased that FHFA recently allowed us to expand the population of people who can take advantage of Refi Now.

These are two instances in which the mortgage process can be adapted to create flexibilities for underserved borrowers and potential borrowers in ways that are smart, practical, safe, and sound. We are also working with lenders and educating borrowers to drive greater adoption of these creative solutions. That’s why we are expanding Fannie Mae’s consumer education efforts.

At the outset of the pandemic, we began our Here to Help campaign. That campaign showed the value of putting credible, independent information in the hands of people navigating housing difficulties.

And we think it will prove equally valuable for first-time homebuyers or potential homebuyers navigating the mortgage process.

More than 5 million unique visitors have visited one of our consumer sites since the pandemic began. This includes the Here to Help pandemic recovery tools, as well as our Your Own Story homebuyer education tools. More broadly, we believe more outreach needs to be done to identify home-ready borrowers who are excluded from traditional underwriting.

These are the kinds of homeowner- and renter-centered initiatives that will be key components of our Equitable Housing Finance Plan. I commend Acting Director Sandra Thompson for her leadership in calling on the GSEs to create these three-year plans, which will lend momentum and focus to the work we already have under way.

We are actively listening to stakeholders as we prepare our plan, and the listening sessions FHFA has organized will help make our plan stronger. FHFA’s leadership on the issue of housing equity is in keeping with its actions across a broad range of areas.

These include:

  • An expansion of our Low-Income Housing Tax Credit Investment activity.
  • And also, FHFA’s recent decision to allow Desktop Appraisals on many purchase loan acquisitions beginning in 2022, which will reduce costs and time for many borrowers. We believe this flexibility is squarely in keeping with our industry’s efforts to make the appraisal process more data driven and more objective.

We share the Acting Director’s conviction that our housing mission, sustainability, and safety, and soundness are inextricably linked.

We look forward to continuing to work with FHFA and others in the housing and mortgage finance markets on the many challenges facing borrowers and renters.

These include:

  • The need to reduce or eliminate financial or other barriers to first-time homeownership, particularly those that don’t benefit borrowers.
  • The need to deliver mortgage capital where it’s most needed and using it to help close inequities where they are most stark.
  • And the need to increase diversity in the housing ecosystem so that our industry reflects the people it serves.

These are all big challenges – and Fannie Mae looks forward to being part of the solutions.

Now, I’ll turn it over to Dave.

David Benson:

Introductory Remarks and Overall Financial Results

Thank you, Hugh.

When we met last quarter to share our strong second quarter results, I noted that they were against the backdrop of a very strong economy, continued low interest rates, and a surge in home price growth.

We saw these trends continue in the third quarter, but to a lesser degree than in the second quarter.

GDP growth, for example, slowed to a 2.0% rate in the third quarter compared to the 6.7% seen in the second. This slower pace was driven in part by global supply chain disruptions.

Home price growth was again strong in the third quarter but not as strong as in the second quarter. For context, we saw year-to-date home price growth through the end of September of 16.0%, which is the highest nine-month growth rate in the history of Fannie Mae's home price index.

Mortgage rates were generally below 3% for the duration of the third quarter, reaching just above 3% in the last week of September.

These factors contributed to our recognition of $4.8 billion in net income and $7.1 billion in net revenues for the third quarter, compared to $7.2 billion in net income and $8.4 billion in net revenues in the second quarter. Although our net income was not as high as the second quarter, the third quarter was another very strong quarter for Fannie Mae.

Our net worth increased to $42.2 billion. Building our net worth continues to be critical to our ability to operate in a safe and sound manner.

Going forward, we expect the pace of both home price growth and refinance volumes to moderate, likely resulting in lower net revenues and lower credit benefits over the next year. I'll discuss these and other expected economic trends in a moment.

Let me now turn to the largest contributors to results in the third quarter, net interest income and credit-related income.

We recognized $7.0 billion in net interest income, a decrease from $8.3 billion in the second quarter.

Due to the growth in our book of business, we've seen base g-fee income increase both quarter over quarter and compared to the third quarter of 2020. Notably, base g-fee income excluding the TCCA fees that we pay to Treasury grew from $2.8 billion during the third quarter of 2020 to $3.6 billion during the third quarter of 2021, an increase of nearly 30%.

Single-family refinances, and as a result, prepayment activity, also slowed compared to Q2. Consequently, net amortization income decreased from $3.7 billion last quarter to $2.3 billion in the third quarter.

While refinance activity was lower compared to last quarter, it remained elevated compared to historical norms due to the continued low interest rate environment we have seen since the onset of the pandemic.

Credit-related income of $868 million was also lower compared to last quarter's $2.5 billion. The $1.7 billion decline was driven by a decrease in the volume of loan redesignations from held-for-investment to held-for-sale in Q3 relative to Q2, less benefit from both actual and forecasted home price growth quarter over quarter, and a shift from benefit to expense related to interest rates as actual and projected interest rates increased during the third quarter, compared to decreases in the second quarter.

Okay, so now I’ll spend a few moments on our Single-Family and Multifamily business segment results.

Single-Family Results

So, in our Single-Family business, we reported $4.0 billion in net income and $6.0 billion in net revenues, impacted by the same factors driving total company results.

Total conventional acquisitions decreased to $296 billion in Q3, compared to $373 billion in Q2 and $391 billion in the third quarter of 2020, driven primarily by a decrease in refinance volumes.

As I mentioned a moment ago, refinances remain elevated by historical standards. But looking at more recent experience, refinance acquisitions were at their lowest since the first quarter of 2020 as many borrowers have already taken advantage of the low-rate environment to refinance.

Accordingly, our purchase share of acquisitions continued to grow this quarter, with Q3 purchase share at 39%, the highest since the third quarter of 2019.

There was a slight decline in the average g-fee charged for third quarter acquisitions relative to the prior quarter, from 47.9 basis points to 47.3 basis points. Removal of the adverse market refinance fee in August of 2021 contributed to this decrease.

The credit performance of our overall single-family guaranty book remained strong.

Our serious delinquency rate continued to decrease to 1.62% as of September 30, down from 2.08% as of June 30, due to the ongoing economic recovery and the decline in the number of single-family loans in COVID-19 forbearance plans.

Our single-family serious delinquency rate excluding loans in forbearance increased to 72 basis points as of September 30, compared to 64 basis points as of June 30, primarily due to loans exiting forbearance without resolving their delinquency.

The record home price appreciation that I noted earlier in my remarks led to a decrease in the weighted average mark-to-market loan-to-value ratio of our overall single-family guaranty book outstanding, declining to 54% as of September 30th.

Multifamily Results

Turning to our Multifamily business, we reported net income of $817 million, up from $645 million in the second quarter, and net revenues of $1.1 billion up from $986 million in the second quarter, driven by continued growth in guaranty fee revenue and elevated prepayment volumes, resulting in increased yield maintenance revenue. G-fee revenue continued to grow as book size increased and as guaranty fees on new acquisitions remained strong.

Our multifamily acquisitions were $16.4 billion in the third quarter, up from $10.9 billion of acquisitions in Q2. This brings our year-to-date volume to $48.8 billion, leaving $21.2 billion remaining under our $70 billion FHFA Scorecard volume cap for 2021.

Recently, the $80 billion, 52-week rolling cap that had been placed on our multifamily acquisition volumes was temporarily suspended. This cap was initially imposed earlier this year due to changes in the Senior Preferred Stock Purchase Agreement. While our $70 billion cap remains for 2021 and increases to $78 billion in 2022, this suspension will better enable us to manage the flow of new business.

And now a few points on the overall performance of our multifamily book of business.

Our multifamily serious delinquency rate continued to decrease to 0.42% as of September 30, down from 0.53% as of June 30. This decline was driven by loans that were in forbearance and have completed repayment plans or have been otherwise reinstated.

Our multifamily SDQ rate, not including loans that received a forbearance, was 0.03%, representing the strength of the overall risk profile of our multifamily book.

We welcome you to refer to our Q3 Financial Supplement that is available on our website along with today’s earnings release for more information on the characteristics of our Single-Family and Multifamily books of business.

COVID Forbearance

Talking about COVID forbearance, we’re now over 18 months into the COVID pandemic and we’re continuing to see the number of new loans in forbearance slowing, thanks to the strong growth seen in the economy and residential housing.

For our single-family loans, 1.2% of our Single-Family book based on loan count was in forbearance at the end of Q3, down from 1.8% as of the end of the second quarter and down from the peak of 5.9% that we saw in May of 2020.

Nearly 1.2 million loans have exited forbearance in 2020 and through September 30 of this year.

Approximately 95% of these exits were successful, meaning the borrower paid off their loan, entered into a workout option such as a payment deferral or modification, or brought their loan current.

Successful exits from forbearance continue to highlight the strength of the economy as well as the value of our loss mitigation programs and our mission-first commitment to helping borrowers stay in their homes, particularly during times of stress.

The federal moratoriums on single-family foreclosures and real estate owned evictions put in place last year as a result of COVID-19 have expired. However, effective in August 2021, the CFPB established certain COVID-19 servicing standards for loans secured by borrower’s principal residence that restrict new foreclosures through year-end. As a result of prior federal and state foreclosure moratoriums, foreclosure volumes were very low through the first nine months of 2021. We expect foreclosure volumes to gradually increase in 2022.

In multifamily, in September of this year, FHFA extended our ability to provide forbearance for COVID-19-impacted multifamily loans indefinitely. The rate of multifamily loans in active forbearance continues to drop, with only 0.1% of our Multifamily book remaining in an active forbearance as of the end of September.

Nearly 90% of the multifamily loans in our current book of business that have taken a forbearance are now on repayment plans or reinstated, while 5.4% have defaulted on their forbearance agreements.

Credit Risk Transfer

Now, I’d like to address credit risk transfer, or CRT, activities since we re-entered the market this month.

In October, we brought three transactions to market, including Single-Family Connecticut Avenue Securities, Single-Family Credit Insurance Risk Transfer, and Multifamily Credit Insurance Risk Transfer transactions.

Through these activities, we have transferred a portion of the credit risk on nearly $116 billion in unpaid principal balance at the time of entering the transactions.

We expect to bring additional transactions to market in 2021, keeping in mind market capacity and conditions.

Notably, in September, FHFA issued a Notice of Proposed Rulemaking that, if adopted as currently proposed, would refine the capital treatment for CRT under the Enterprise Regulatory Capital Framework to encourage the distribution of credit risk to private investors. FHFA invites public comments on the proposed rule on or before November 26.

In the normal course of business, we consistently evaluate various ways to manage our credit risk exposure and CRT remains a tool we can employ.


Now, before I turn it back to Hugh, I’ll address some points on our outlook.

While the macro environment continues to be strong, our Economic and Strategic Research Group recently revised downward its full year 2021 real GDP growth projections. We lowered our projection for three reasons. First, we have concerns about the speed at which the current supply chain disruptions will resolve. Second, we have revised our inflation projection upward. And third, we expect that services-related consumer spending will take longer to return to more historically normal levels.

We are now projecting 4.9% GDP growth in 2021 after a decline of 2.3% that was seen in 2020.

We now expect full-year home price growth in 2021 will be an exceptionally strong 18.4% based on Fannie Mae's home price index, up from our expectation of 14.8% reported last quarter, as housing supply remains constrained, but demand has yet to soften materially.

For 2022, we expect home price growth to moderate to just below 8%, driven by a combination of higher rates caused by continued inflationary pressures and expected Fed tapering later this year, affordability pressures, and an easing of housing supply constraints.

Risks to our outlook remain, including supply chain disruptions, the potential for higher inflation, rising interest rates, labor market tightness and the impact of COVID on the U.S. and abroad.

We also expect total 2021 single-family market originations of $4.3 trillion, a slight decline relative to the record numbers of the prior year.

For full-year 2021, we continue to expect purchase originations to increase 18% relative to 2020, to a total of $1.85 trillion, driven by higher home sales and strong home price growth.

For the last quarter of the year, we expect refinances to continue to fall due to a modest expected rise in interest rates, which will likely drive fewer loan prepayments and lower amortization income than in the first three quarters of the year.

In 2022, we expect single-family market originations to drop over 20% to $3.3 trillion, driven by a large decline in refinance originations, as fewer borrowers will find refinancing beneficial given the expected higher rates and the fact that many borrowers refinanced in 2020 and in 2021.

In Multifamily, our market outlook for the rest of the year remains positive. As expected, the volatility in rent growth stemming from pent up demand appears to be slowing, with third party rental data showing a slight decline in rent growth in September. The third quarter appears to have been the peak for estimated multifamily rent growth of about 3.5%, resulting in expected annual rent growth of at least 8 to 9% in 2021.

We expect rent growth to begin normalizing over the coming months into 2022 as local economies further stabilize, although we continue to be cautious given the risks to the outlook mentioned above. While the pace of future evictions remains unclear, the recent increases in job growth and wage growth, along with the estimated increase in household savings over the past year, support an optimistic outlook for future rental payments.

We expect multifamily originations to be between $380 billion and $410 billion in 2021 and continue to be strong in 2022, likely increasing slightly compared to 2021.

Okay, and with that, I will turn it back to you, Hugh.

Hugh R. Frater:

Thanks again for joining us this morning. We’ll speak with you again next quarter.

Fannie Mae Moderator:

Thank you, ladies and gentlemen. That concludes today’s call. You may disconnect.