Freddie Mac Q4 2023 Earnings Call Transcript

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February 14, 2024

Key Takeaways

  • Freddie Mac reported full-year 2023 net income of $10.5 billion, up 13% year-over-year, and comprehensive income of $10.7 billion, driven by a credit reserve release from improving house prices.
  • The company helped over 1.4 million families in 2023—including financing more than 800,000 home purchases—with first-time homebuyers representing 51%, the highest level in 30 years.
  • Net interest income rose 3% to $18.5 billion on higher short-term rates, while non-interest income declined 18% to $2.7 billion as prior-year hedging gains did not recur.
  • Freddie Mac’s total mortgage portfolio grew 2% to $3.5 trillion at year-end (single-family +2%, multifamily +3%), and its net worth increased 29% to $47.7 billion.
  • In Q4 2023, net income jumped 65% to $2.9 billion on higher revenues and another credit reserve release, with net revenues up 11% and non-interest income surging 147% year-over-year.
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Earnings Conference Call
Freddie Mac Q4 2023
00:00 / 00:00

There are 2 speakers on the call.

Operator

Good morning and thank you for joining us for a presentation of Freddie Mac's 4th I'm Jeff Markowitz, Deputy CAO and Senior Vice President of External Affairs and Corporate Communications. We're joined today by our Chief Financial Officer, Chris Lown. Before we begin, we'd like to point out that during the call, Mr. Lown may make forward looking statements based on assumptions about the company's key business drivers and other factors. Changes in these factors could cause the company's actual results to materially vary from its expectation.

Operator

A description of these factors can be found in the company's annual report on Form 10 ks filed today. You'll find the 10 ks, earnings press release and related materials posted on the Investor Relations section of freddiemac.com. This call is recorded and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcast or transcribed. With that, I'll turn the call over to Freddie Mac's CFO, Chris Lown.

Speaker 1

Good morning, and thank you for joining our call to review Freddie Mac's 4th Quarter and Full Year 2023 Financial Results. For the company, 2023 marked the year of continued progress. We put our housing mission at the center of all we do, helping more than 1,400,000 families buy, refinance or rent a home in the past year. And Of the more than 800,000 home purchases we financed in 2023, nearly 51% of those who purchased a primary residence were first time homebuyers. That is the highest percentage of first time homebuyers since Freddie Mac started tracking that statistic 3 decades ago.

Speaker 1

Freddie Mac achieved these mission oriented goals while continuing to develop a strong and talented workforce, manage its risks and deliver solid financial results. Now let's take a look at those results in more detail. This morning, we reported full year 2023 net income of $10,500,000,000 an increase of 13% from the prior year and comprehensive income of $10,700,000,000 an increase of 19% from the prior year. These increases were primarily driven by a credit reserve release the single family business, which resulted from an improvement in house prices in 2023. Full year net revenues of 21 $200,000,000 were slightly lower than last year as the increase in net interest income was offset by lower non interest income.

Speaker 1

Full year net interest income was $18,500,000,000 a 3% year over year increase driven primarily by higher Investments net interest income as a result of higher short term interest rates. The increase in Investments net interest income was partially offset by lower guarantee net interest income, which declined by 7% year over year. This was primarily driven by a decrease in deferred fee income as prepayments slowed due to higher mortgage rates. Non interest income was $2,700,000,000 down 18% year over year As the prior year period included spread related gains on commitments to hedge the single family securitization pipeline that did not recur in 2023. An improvement in house prices drove an $872,000,000 benefit for credit losses this year versus a provision of $1,800,000,000 in the prior In 2022, the provision for credit losses was driven by deterioration in housing market conditions.

Speaker 1

Our non interest expense grew 14% year over year or $1,100,000,000 to $8,900,000,000 primarily driven by an increase of $646,000,000 in our net credit enhancement expense. The increase in our net credit enhancement expense was due to a higher volume of outstanding cumulative CRT transactions, combined with higher losses on stacker note repurchases, as well as a decrease in our credit enhancement recoveries due to a decline in expected credit losses on covered loans. 2023 non interest expense also includes an expense accrual of $313,000,000 related to a previously reported adverse litigation judgment. Our total mortgage portfolio grew 2% year over year to $3,500,000,000,000 at the end of 2023, driven by a 2% increase in our single family mortgage portfolio and a 3% increase in our multifamily mortgage portfolio. Turning to our Q4 2023 results.

Speaker 1

We reported net income of $2,900,000,000 an increase of 65% from the Q4 of 2022. The increase in net income was primarily driven by higher revenues and a credit reserve release in the single family business. Net revenues for the 4th quarter totaled $5,400,000,000 an increase of 11% year over year, driven by an increase both net interest income and non interest income. 4th quarter net interest income of $4,800,000,000 was up 4% from the prior year quarter. This was primarily driven by an increase in our investments in net interest income, which benefited from higher short term interest rates.

Speaker 1

Non interest income for the Q4 was $604,000,000 an increase of 147% from the prior year quarter. This was primarily driven by higher multifamily guarantee income and higher net investment gains, which benefited from a decline in interest rates in the quarter and higher volume of single family health for sale loan sales. Our benefit for credit losses last quarter was $467,000,000 and was primarily driven by a credit reserve release in our single family business due to an improvement in house prices. In the prior year quarter, We had a credit reserve provision of $575,000,000 that was driven by a deterioration in house prices. Non interest expense for the Q4 was $2,200,000,000 up $148,000,000 or 7% year over year, primarily driven by a decrease in credit enhancement recoveries, which is due to a decline in expected credit losses on covered loans.

Speaker 1

Turning to our individual business segments. Single Family reported full year net income of $9,000,000,000 an increase of $1,100,000,000 or 14% from the prior year. This was primarily driven by a credit reserve release in 2023. The benefit for credit losses was $1,200,000,000 driven by an improvement in house prices. In 2022, we had a provision expense of $1,800,000,000 which was primarily driven by deterioration in housing market conditions and a slowdown in actual house price appreciation.

Speaker 1

House prices increased 6.6% in 2023 compared to 4.9% in 2022. Our current forecast assumes house prices will grow by 2.8% over the next 12 months and 2% over the subsequent 12 months, Whereas our December 2022 forecast assumes a decline of 3% in the next 12 months, followed by a decline of 1.8% in the subsequent 12 months. The single family allowance for credit losses coverage ratio at the end of the year was 20 basis points, down from 25 basis points a year earlier. Full year single family net revenues of $18,300,000,000 declined by $484,000,000 or 3% from 2022. This decline was primarily driven by lower non interest income of $610,000,000 a decline of $1,100,000,000 year over year As the prior year period included spread related gains on commitments to hedge the single family securitization pipeline that did not recur in 2023.

Speaker 1

This decline was partially offset by higher net interest income of $17,700,000,000 which increased 3% year over year, primarily driven by higher investments net interest income benefiting from higher interest rates, partially offset by lower deferred fee income driven by slower mortgage prepayments. Liquidation rate on our single family mortgage portfolio declined to 8.3% for 2023 versus 12.4% for 20 22. Full year new business activity was $300,000,000,000 down $241,000,000,000 or 45% from 2022 as both refinance and purchase activity declined due to higher mortgage interest rates. According to Freddie Mac's primary mortgage market survey, Mortgage rates for the 30 year at the end of 2023 were 6.61%, up from 6.42% on December 31, 2022. Home purchase volume of $265,000,000,000 accounted for 88% of our total new business activity for the year.

Speaker 1

As I noted earlier, 1st time homebuyers represented 51% of new single family home purchase loans. The average guarantee fee rate charged on new business was 56 basis points, up 5 basis points from 2022. The credit characteristics of our new business remain strong with an average estimated loan to value ratio of 78% and a weighted average credit score of 752. Our single family mortgage portfolio increased 2% year over year to more than $3,000,000,000,000 at the end of 2023. Our single family portfolio credit characteristics remain strong with the weighted average current loan to value ratio at 52% and the weighted average current credit score at 755.

Speaker 1

Our single family series delinquency rate declined to 55 basis points as of December 31, 2023, down 11 basis points from 66 basis points at year end 2022. The single family serious delinquency rate remains historically low and is down 8 basis points from the pre COVID rate of 63 basis points at the end of 2019. During the year, we helped approximately 81,000 families remain in their homes through loan workouts. Our loan workouts have continued to decline in line with the decline in the seriously delinquent loan population. At the end of the year, 61% of our single family portfolio had some form of credit enhancement.

Speaker 1

Moving to multifamily. The business reported full year net income of $1,500,000,000 up 5% from the prior year, primarily driven by higher non interest income. Full year net revenues of $3,000,000,000 increased 18% year over year. This increase was primarily driven by an increase in non interest income, which increased 32% year over year to $2,100,000,000 primarily driven by lower fair value losses on guarantee assets as a result of lower medium term interest rates. The provision for credit losses for 2023 was $300,000,000 an increase of $231,000,000 from 2022.

Speaker 1

The increased credit reserve build was primarily driven by heightened uncertainty in forecasted economic and multifamily market conditions as well as deterioration in overall loan performance. Multifamily new business activity for the full year was $48,000,000,000 a decrease of 34% from 2022 and below the FHFA cap of $75,000,000,000 The decline in new business activity was driven by the overall slowdown in the multifamily origination market as higher rates reduce the demand for multifamily financing. For 2024, FHFA has reduced the cap to $70,000,000,000 with at least 50% of the activity to support mission driven affordable housing. Our multifamily mortgage portfolio at the end of 2023 was $441,000,000,000 an increase of 3% year over year. The multifamily delinquency rate was 28 basis points at the end of the year, up from 12 basis points at the end of 2022.

Speaker 1

This increase was primarily driven by an increase in delinquent loans in our senior housing and small balance loan portfolios. 89% of these delinquent loans have credit enhancement coverage, reducing our credit risk exposure. At year end, 94% of the multifamily mortgage portfolio was covered by credit enhancements. Our net worth increased to $47,700,000,000 at the end of the year, representing a 29% increase from 2022. In conclusion, Freddie Mac made home possible for more than 1,000,000 families in 2023, while delivering solid financial results.

Speaker 1

Looking ahead, we will continue to serve our mission while remaining safe and sound.

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