Federal Home Loan Mortgage Q1 2024 Earnings Call Transcript

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May 1, 2024

There are 2 speakers on the call.

Operator

Good morning and thank you for joining us for a presentation of Freddie Mac's Q1 2024 Financial Results. I'm Jeff Markowitz, Deputy CAO and SVP of External Affairs and Corporate Communications. We're joined today by our CFO, 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.

Operator

Changes in these factors could cause the company's actual results to materially vary from its expectations. A description of those factors can be found in the company's quarterly report on Form 10 Q filed today. You'll find the 10 Q 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.

Operator

With that, I'll turn the call over to Freddie Mac's CFO, Chris Lowen.

Speaker 1

Good morning, and thank you for joining our call to review Freddie Mac's Q1 2024 financial results. Before I move on to our earnings, I'd like to offer some brief remarks about the mission our financial performance supports. In the Q1, Freddie Mac helped make it possible for 100 of thousands of families to rent, buy or refinance a home. 90% of the rental homes we help finance were affordable to low and moderate income families. First time homebuyers represented 52% of new single family home purchase loans.

Speaker 1

That's a new high for us. We are working to extend these opportunities to more borrowers and renters in a safe, sound and sustainable way. Here are three examples of how we move toward that goal since the beginning of the year. First, we added to our affordability toolkit for very low income homebuyers Through our Home Possible very low income purchase credit, eligible families earning 50% or less of area medium income can now receive a $2,500 credit to help them with closing costs or a down payment. 2nd, we made mission focused investing easier for the firms that supply liquidity to the U.

Speaker 1

S. Housing finance system. Updates to our mission index could help investors identify mortgage backed securities meeting their social investment goals. And 3rd, we continue to update our risk management practices. We recently announced multifamily policy and process changes, including enhanced property inspection requirements and appraisal reviews that further strengthen our underwriting due diligence and risk mitigation.

Speaker 1

Through these actions and others, Freddie Mac is helping to make home possible for families across the country a safe and sound manner. Now let's take a look at our financial results. We earned net income of $2,800,000,000 this quarter, an increase of $771,000,000 or 39% year over year. This increase was primarily driven by higher net investment gains and higher net interest income, which benefited from higher rates. 1st quarter net interest income was $4,800,000,000 up 6% year over year.

Speaker 1

The single family mortgage portfolio grew 2% and saw a 1 basis point increase in the average estimated single family guarantee fee rate. Higher investment income benefiting from higher short term interest rates also contributed to the increase in net interest income. These positive drivers were partially offset by lower deferred fee income recognition resulting from slower prepayments due to higher mortgage rates. Non interest income for the Q1 was $1,000,000,000 an increase of $672,000,000 from the prior year quarter, primarily due to an increase in net investment gains in multifamily. Our provision for credit losses was $181,000,000 for this quarter, driven by modest credit reserve bills in both business segments compared to a higher provision expense of $395,000,000 for the prior year quarter, which was primarily attributable to new acquisitions in that period.

Speaker 1

Our total mortgage portfolio at the end of this quarter was $3,500,000,000,000 a 2% increase year over year. Turning to our individual business segments. The single family segment reported net income of $1,900,000,000 for the quarter, up $268,000,000 or 16% year over year. Single family net revenues of $4,500,000,000 increased 6% from the prior year quarter. This increase was primarily driven by a 4% increase in our net interest income, which benefited from continued growth in our single family mortgage portfolio.

Speaker 1

Investment net interest income also increased due to higher short term interest rates. These increases were partially offset by lower deferred fee income due to slower prepayments as a result of higher mortgage rates. Our provision for single family credit losses was an expense of $120,000,000 this quarter, primarily due to a modest credit reserve build for new acquisitions and the impact of higher mortgage rates. The provision in the prior year quarter was $318,000,000 which was primarily attributable to new acquisitions. Our current house price forecast assumes an increase of 0.2% over the next 12 months and 0.6% over the subsequent 12 months.

Speaker 1

This is down from our forecast at end of last quarter, which assumed 2.8% and 2% growth over the next 12 and subsequent 12 months, respectively. The single family allowance for credit losses coverage ratio at the end of the quarter was 20 basis points, unchanged from the last quarter and down 6 basis points year over year. The single family serious delinquency rate continued to be historically low and declined to 52 basis points at the end of the Q1, down 10 basis points from 1Q 2023 and 3 basis points from 4Q 2023. In the Q1, we helped approximately 21,000 families remain in their homes through loan workouts. Our single family mortgage portfolio at the end of the quarter was $3,000,000,000,000 up 2% year over year.

Speaker 1

Credit characteristics of our single family portfolio remained strong with the weighted average current loan to value ratio at 52% and the weighted average current credit score at 754. At the end of the quarter, 61% of our single family portfolio had some form of credit enhancement. New business activity totaled $62,000,000,000 this quarter, slightly up from $59,000,000,000 from 1Q 2023. First time homebuyers represented 52% of our total new business activity. Higher mortgage rates continued to impact both purchase and refinance activity.

Speaker 1

Refinance activity accounted for 15% of our total new business activity this quarter, which was slightly up from 11% in 4Q 2023. Mortgage rates at the end of the quarter were 6.79%, up from 6.61% at end 4Q 2023 and 6.32 percent atend1q2023. The weighted average original loan to value on new purchases was 78% and weighted average original credit score was 753, while the average estimated guarantee fee charged on the new business was 55 basis points. Moving on to multifamily, the segment reported net income of $821,000,000 up $503,000,000 from the prior year quarter. This increase was primarily driven by higher non interest income of $1,000,000,000 which increased $593,000,000 from the prior year quarter.

Speaker 1

This increase in non interest income was primarily driven by net gains from interest rate risk management activities, higher revenues from held for sale loan purchase and securitization activities and favorable fair value changes from spreads. Net interest income of $271,000,000 was up 32% year over year, primarily driven by higher yields on mortgage loans as a result of higher interest rates and the larger average PC portfolio. Multifamily provision for credit losses was an expense of $61,000,000 this quarter versus $77,000,000 in the prior year quarter. Our multifamily new business activity was $9,000,000,000 for the Q1, up $3,000,000,000 or 50% from a year ago. Our multifamily business provided financing for 85,000 multifamily rental units this quarter, of which 61% were affordable to low income families.

Speaker 1

The multifamily mortgage portfolio increased 4% year over year to $443,000,000,000 Approximately 94% of the multifamily mortgage portfolio was covered by credit enhancements at the end of this quarter. The multifamily delinquency rate at the end of the quarter was 34 basis points, up 21 basis points versus 13 basis points at the end of March 2023. This increase was primarily driven by delinquency in our floating rate loans and small business loans portfolio. 94% of these delinquent loans had credit enhancement coverage. On the capital front, our net worth increased to $50,500,000,000 at the end of the quarter, representing a 29% increase year over year.

Speaker 1

In conclusion, Freddie Mac helped 279,000 families purchase, refinance or rent a home, while delivering solid financial results this quarter. Importantly, most of the liquidity we provided supported low and moderate income households as well as first time homebuyers. As affordability challenges are expected to persist, efforts to expand affordability for homeowners and renters will remain a key focus of Freddie Mac. Thank you for joining us today.

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Federal Home Loan Mortgage Q1 2024
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