Federal National Mortgage Association Q1 2024 Earnings Call Transcript

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April 30, 2024

There are 4 speakers on the call.

Operator

Good day, and welcome to the Fannie Mae First Quarter 2024 Financial Results Conference Call. At this time, I will now turn it over to your host, Pete Bekell, Fannie Mae's Director of External Communications.

Speaker 1

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's Q1 2024 financial results. Please note this call includes forward looking statements, including statements about Fannie Mae's expectations related to economic and housing market conditions, the future performance of the company's book of business and the company's business plans and their impact. Future events may turn out to be very different from these statements. The forward looking statements sections in the company's Q1 2024 Form 10 Q filed today and in the Risk Factors and Forward Looking Statements sections in the company's 2023 Form 10 ks filed on February 15, 2024 describe factors that may lead to different results. A recording of this call may be posted on the company's website.

Speaker 1

We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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, Priscilla Amodovar and Fannie Mae Chief Financial Officer, Priscilla C. Hally.

Speaker 2

Welcome and thank you for joining us today. I'll begin this morning by spending a few minutes on the economic environment and then we'll turn it to our financial and mission performance for the Q1 of 2024. After that, our Chief Financial Officer, Chrissa Haley will discuss our Q1 results in more detail. The U. S.

Speaker 2

Economy in the Q1 continued to grow, but at a slower pace. 1st quarter GDP was 1.6%. Inflation remained persistent at 3.2%, still above the Federal Reserve's 2% target. The 30 year fixed rate mortgage rate averaged 6.7% during the quarter compared to 7.3% in the Q4 of 2023. Home supply continued to be constrained and as a result home prices remained strong.

Speaker 2

We estimate that home prices rose 1.7% during the quarter. Current interest rates combined with high home prices continued to put pressure on housing affordability. Despite these pressures, consumers seem to be adjusting their expectations on mortgage rates and the home price environment. According to our recent home purchase sentiment index, consumers are slightly more optimistic about both home buying and home selling conditions. For lenders, overall market single family mortgage origination activity continued to be sluggish at an estimated $330,000,000,000 for the quarter and relatively flat compared to the prior quarter.

Speaker 2

In multifamily, the market saw property values continue to decline. Nationally, there was slight rent growth of an estimated 25 basis points in the Q1 after rent declines in the prior one. Despite the softening in rents, affordability continues to remain a challenge for renters in many parts of the country. Turning to our Q1 financial results. We reported $4,300,000,000 in net income compared to $3,900,000,000 in Q4.

Speaker 2

As a result, through our retained earnings, we continued to build our net worth, which increased to $82,000,000,000 as of the end of March. This further bolsters our financial stability, which enables us to continue to deliver on our mission. To that end, we provided $72,000,000,000 of liquidity to the single family and multifamily markets in the Q1. In doing so, we helped 280,000 households buy, refinance or rent a home. This included approximately 89,000 units of multifamily rental housing, a significant majority of which were affordable to households earning at or below 120% of area median income.

Speaker 2

We also helped 76,000 first time homebuyers to purchase a home. These numbers demonstrate our commitment to serving the housing market. We are focused on shaping a market that works better for everyone. This includes our continued work to alleviate obstacles that many renters and homebuyers face in their home purchase journey, specifically insufficient credit and high upfront costs. For example, this past quarter, we announced a temporary enhancement to HomeReady, our flagship 3% down 30 year mortgage product to include $2,500 to use towards down payment or closing costs for purchase borrowers who make no more than 50% of area median income.

Speaker 2

We also expanded our Home Ready 1st special purpose credits program to an additional 15 markets for a total of 21 markets. This program offers flexibility such as down payment assistance, expanded income level eligibility and reduced closing costs for borrowers residing in these markets. And just yesterday, we published a new 1st generation homebuyer definition for use by the housing industry. Disparities in homeownership and wealth among families are strongly correlated to homeownership from prior generations. We hope that developing the standard definition allows the industry to understand and explore new ways of addressing these disparities and to scale programs to support these homebuyers.

Speaker 2

We are also creatively using our role in the capital markets to support our mission. This past quarter, we launched our enhanced single family mission index disclosures, which help interested mortgage backed security investors allocate their capital in support of affordable housing and underserved borrowers and markets. These disclosures are the foundation of our single family social bonds, which are designed to attract additional capital to U. S. Housing.

Speaker 2

To play our important role of providing liquidity and stability to the U. S. Housing system, we are laser focused on risk management. In fact, our ability to deliver on our mission depends on it. You'll see this through our sound underwriting standards and the ways we are responsibly helping the housing market see and serve more people.

Speaker 2

You'll also see this through our servicing standards and support we provide to homeowners and renters in distress. These efforts not only help the consumers that the housing market serves, but they make our business and the market more resilient. Thanks to our dedicated teams, for continuing to deliver on our mission to facilitate equitable and sustainable access to homeownership and quality affordable rental housing across America. Now I'll turn it over to Christa to discuss our Q1 financial results.

Speaker 3

Thank you, Priscilla, and good morning. As Priscilla mentioned, we reported 4 point $3,000,000,000 in net income in the Q1, a $377,000,000 increase compared to the Q4 of last year. Our first quarter revenues remained strong with $7,000,000,000 of net interest income, thanks to healthy guarantee fees. We saw a benefit for credit losses this quarter of $180,000,000 as opposed to a provision of $116,000,000 we recorded the prior quarter. This was driven by a release in reserves due to increases in forecasted single family home prices, partially offset by an increase in reserves for multifamily.

Speaker 3

The multifamily increase is due primarily to declining actual and near term projected property values as well as increases in actual and projected interest rates compared to the company's prior forecast. Increases in interest rates drove around $480,000,000 in fair value gains compared to approximately $100,000,000 in fair value losses recognized in the previous quarter. In our single family business, we acquired $62,000,000,000 in loan this quarter compared to $70,000,000,000 in the Q4 of last year. This is the lowest quarterly acquisition volume we have seen since the Q3 of 2000. Continued high interest rates, housing affordability constraints and limited supply Our overall single family book of business remains strong with a weighted average mark to market loan to value ratio of 51% and a weighted average credit score at origination of 753.

Speaker 3

Current economic conditions, including low unemployment, our underwriting standards and effective loan workout options for distressed borrowers resulted in our single family serious delinquency rate remaining near historically low levels as of March 31 at 51 basis points. A slowing economy may impact the credit performance of loans in our single family guarantee book of business, which could lead to an increase in our single family serious delinquency rate. In the Q1 of this year, we executed 5 single family credit risk transfer transactions between our Connecticut Avenue Securities and Credit Insurance Risk Transfer Programs. With these transactions, we transferred a portion of the credit risk on approximately $69,000,000,000 of unpaid principal balance at the time of the transactions. We paid $380,000,000 in premiums during the quarter on our outstanding single family credit risk transfer transactions.

Speaker 3

Turning to our multifamily business, we acquired approximately $10,000,000,000 in multifamily loans this quarter compared to approximately $11,000,000,000 last quarter. This was similar to the Q1 of last year and is the lowest quarterly acquisition volume we have seen since the Q4 of 2015. Our multifamily book had a weighted average original loan to value ratio of 63% and a weighted average debt service coverage ratio of 2 times. During the last several quarters, higher interest rates and investor yield requirements have reduced multifamily property sales transactions and placed downward on multifamily property valuations. According to data from the MSCI Real Assets Commercial Property Price Index, multifamily property values declined 19% from the peak in July 2022 to March 2024 and are now back to the levels seen in 2021.

Speaker 3

We continue to monitor the impacts of elevated interest rates on our multifamily book. Higher rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. While our near term maturities remain low, market maturities are expected to be elevated, which could put additional pressure on the multifamily market. Roughly 1.6% of our multifamily book is expected to mature in 2024 and approximately 3.5% is expected to mature in 2025. Our multifamily serious delinquency rate decreased slightly to 44 basis points as of March 31, 2024 from 46 basis points as of December 31, 2023.

Speaker 3

In addition to DUS, our primary multifamily risk sharing model, we completed 1 multifamily credit risk transfer in the Q1 through our multifamily CERT program. This transferred a portion of the credit risk on $11,500,000,000 of unpaid principal balance at the time of the transactions. Lastly, I'll touch on our current economic outlook. There is a significant amount of uncertainty related to the Federal Reserve's next steps on interest rates. While our economists currently expect 2 rate cuts from the Fed later this year, further persistence in inflation poses the possibility of 0 cuts in 2024.

Speaker 3

Home prices continue to be strong and our current forecast is that home prices will rise 4.8% in 2024, up 1.6 percentage points from last quarter's projection. We believe affordability challenges, the lock in effect and a low inventory of homes available for sale will likely persist this year. We expect single family mortgage originations to grow from $1,500,000,000,000 in 2023 to approximately $1,800,000,000,000 in 2024. Purchases are likely to continue to dominate the market given the rate environment and we estimate they will make up over 75% of single family mortgage originations this year. 2024 multifamily market origination volumes are estimated to be between 300 dollars to $340,000,000,000 up from an estimated $265,000,000,000 in volume for 2023, but down from $480,000,000,000 in 2022.

Speaker 3

We believe that with continued high interest rates, elevated new supply completions and higher than average vacancy rates, multifamily sales activity will remain subdued in the near term, which could result in additional declines in multifamily property values over the short term. Over the longer term, however, we expect sales and valuations will improve due to expected improvements in multifamily housing market fundamentals stemming from positive demographic trends and ongoing job growth. We expect rent growth to remain below historical averages in the 1% to 1.5% range in 2024 as a result of elevated new construction completions and many renters dealing with higher levels of consumer debt. Our expectations are based on many assumptions and our actual results could differ materially from our current expectations. I invite you to visit fanniemae.com where you'll find a financial supplement with today's filing that provides additional insights into our business.

Speaker 3

Thank you so much for joining us today.

Operator

Thank you, everyone. That concludes today's call. You may disconnect.

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Key Takeaways

  • We reported $4.3 billion in net income for Q1 and grew net worth to $82 billion, while providing $72 billion in liquidity to support 280,000 households, including 89,000 affordable multifamily units and 76,000 first-time homebuyers.
  • The U.S. economy grew 1.6% in Q1 with persistent 3.2% inflation and an average 30-year mortgage rate of 6.7%, keeping affordability under pressure despite a slight rise in consumer homebuying and selling sentiment and a 1.7% increase in home prices.
  • We enhanced our mission-driven offerings by adding a temporary $2,500 down payment or closing cost credit to HomeReady for low-income borrowers, expanding our HomeReady 1st special purpose credits to 21 markets, publishing a standard first-generation homebuyer definition, and launching single-family social bond disclosures.
  • Our disciplined risk management drove a $180 million benefit for credit losses, maintained historically low serious delinquency rates (51 bps single family; 44 bps multifamily), and transferred risk on approximately $69 billion of single-family and $11.5 billion of multifamily unpaid principal balance through credit risk transfer programs.
  • Looking ahead, we forecast two Fed rate cuts this year, 4.8% home price growth, single-family mortgage originations rising to $1.8 trillion, multifamily volumes of $300–$340 billion, and rent growth of 1–1.5%, while noting ongoing affordability and supply challenges.
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Earnings Conference Call
Federal National Mortgage Association Q1 2024
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