Federal Home Loan Mortgage Corporation

Good morning and thank you for joining us for a discussion of Freddie Mac's fourth quarter and full year 2019 financial results. We're joined today by the company's CEO, David Brickman; Interim CFO, Donald Kish; CAO, Jerry Weiss; and General Counsel, Ricardo Anzaldua.

Before we begin, we'd like to point out that during this call Freddie Mac executives may make forward-looking statements which are based on a set of assumptions about the company's key business drivers and other factors. Changes in these factors could cause the company's actual results to vary materially from its expectations.

A description of these factors can be found in the company's annual report on Form 10-K filed today. Freddie Mac executives also may discuss non-GAAP financial measures.

For more information about those measures, please see our earnings press release and related materials which are posted on the Investor Relations section of freddiemac.com. Our commentary today will be limited to business and market topics.

As you know we cannot comment on public policy or legislation concerning Freddie Mac. As a reminder, this call is for the media and only they can ask questions.

It is being recorded and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcast or transcribed.

With that I will turn the call over to Freddie Mac's CEO David Brickman.

Thank you, Jeff. Good morning and welcome to our fourth quarter and full year earnings call.

I'm excited to recap the significant progress our company made in 2019 and share with you some of the big developments we're working toward in the year ahead. Today I'll touch on three topics.

First, our financial performance over the course of 2019; second the progress we have made to further Freddie Mac's role as a leader in housing; and third, our current thinking about the housing market in 2020. I'll conclude by discussing how all this relates to our primary focus preparing to responsibly exit conservatorship.

Let me start with our financial performance. We ended 2019 with a very strong fourth quarter recording $2.4 billion of comprehensive income.

This was a $0.6 billion increase over the prior quarter. For the year overall, Freddie Mac saw continued solid earnings with strong returns and a decline in the amount of capital necessary to manage our risks.

Specifically, our comprehensive income in 2019 was $7.8 billion, down $0.8 billion from 2018. The company's modest drop in income is largely attributable to three factors.

First, the low interest rate environment reduced net interest income on our investment portfolio. Second, guaranteed portfolio amortization income decreased.

Product the timing differences between when we see the proceeds from loan prepayments and the remittance of those proceeds to security holders. This partially offset otherwise strong business revenue.

And third, the investments we made to reduce our risks and make our business more efficient increased our costs. I'll elaborate on some of those investments later in my remarks.

In addition to these factors, I note that other income was lower in 2019. This is due in part to a $0.3 billion judgment we obtained in 2018 and we do not receive a similar judgment in 2019.

Our return on conservatorship capital remained relatively unchanged from 2018 at a 15%. This proxy for return on equity is a good indication that our company is maintaining a consistent and stable risk-adjusted return.

It is also evidence of our strength as a well-managed financial institution is making good decisions in the best interest of taxpayers. In addition, we continue to demonstrate our core strength as a risk manager, most notably due to a decline of $4.8 billion in the amount of conservatorship capital needed to support our business.

This can largely be attributed to credit risk transfer activity, home price appreciation and a disposition of legacy assets, as well as a decrease in deferred tax assets. This reduction combined with the continued strong and stable credit performance in our mortgage business illustrates the strength of our risk culture.

Let me note one additional item in terms of financial performance related to the implementation of the Financial Accounting Standard Board's new current expected credit loss accounting known to CECL. I can report that we expect to recognize a non-material decrease to retained earnings of $0.2 billion upon CECL adoption on January 1st 2020.

Finally, in 2019, we executed on what matters most at Freddie Mac, our mission of providing liquidity, stability and affordability to the housing market. In fact, over the course of the year, we held nearly 2.6 million families to own or rent a home by providing nearly $558 billion in funding to the mortgage market.

We served approximately 950 regional and community oriented single-family lenders. We purchased nearly 1.8 million home loans including loans to nearly 395,000 first-time homebuyers and we financed 809,000 rental units.

94% of which were affordable to families earning at or below 120% of area median income. Beyond these numbers, 2019 also marked a year of evolution as we continue to transform our company to be the leader in housing across a number of dimensions.

That evolution includes a successful launch of the Uniform Mortgage Backed Security or UMBS, our continually evolving credit risk transfer programs and advancements in our internally and externally focused technology. Launched in June, the UMBS is one of the most important developments in housing finance since our founding.

In a short time, we have seen more than $27 trillion that was trillion with a T dollars securities are traded in the combined to be announced or TBA market. The tremendous volume of trading on the new UMBS has enhanced secondary market liquidity which should ultimately lower mortgage costs for homebuyers.

Our pioneering credit risk transfer or CRT programs, achieved new heights in 2019 surpassing $50 billion of single-family credit risk transferred from Freddie Mac to investors. The percentage of our single-family credit guarantee portfolio and the percentage of our multifamily mortgage portfolio covered by credit enhancements or risk transfers increased to 56% and 89% respectively as of December 31, and we continue to find new innovative ways to move more risk to the private sector last year.

For example, in single-family we introduced a new offering that transfers additional first loss risk that our company previously retained. And in multifamily, we launched our first ever K-Deal with a class of securities tied to the new structured overnight financed rate or SOFR the index which is expected to replace LIBOR over the next two years.

We also made progress in our ongoing digital transformation in 2019 helping to improve our efficiency and increase our operational risk. We have made significant investments in improving our technology, adding new collaboration and productivity tools that have changed the way we work as a company.

We also adopted an agile environment for product development that brings IT and business together to be faster, smarter and more collaborative. The results include integrated software applications such as our single family's Asset and Income Modeler or AIM, which automates the process of borrower data verification.

AIM makes it possible for lenders to close loans faster and creates a better financing experience for homebuyers. The automation of this process also helps to remove subjectivity from borrower asset and income assessments, reduces errors, helps to calculate risk more easily and accurately.

Our multifamily business is also driving toward a digital platform. We recently introduced a digital inspection application that allows inspectors to use a mobile device to digitally record inspection observations including photos, decreasing potential operational and credit risk for Freddie Mac.

In addition, we've ramped up our industry-leading research to help more families. Our efforts range from economic outlooks and insight -- respect of the housing market to end to no research on the changing preferences of today's renters and owners.

In fact, we recently released a landmark study on Generation Z, the large population cohort born since the mid-1990s the generation after generation -- after the millennials -- excuse me which will profoundly influence our industry over the next few decades in which I find particularly interesting given I'm the parent of three generations years. Looking ahead the actions we took in 2019 helped to prepare us for the environment we expect in 2020 and beyond.

So what do we see coming? We expect mortgage rates to remain low over the next two years which will continue to fuel purchase demand and bring modest market growth.

We project home sales will increase steadily from $6 million in 2019 to $6.3 million in 2021 while home price growth should deaccelerate. We believe we'll continue to climb at an annual rate of 2.8% in 2020.

The optimistic outlook for growth of the market and home price appreciation unfortunately comes with a downside as supply continues to tighten. The nation's housing stock is suffering.

The United States added 9.8 million housing units in the last decade compared to an average of 18 million per decade over the last 50 years. Even the 10-year high of 1.3 million units delivered in 2019 fell short of an annual housing demand by about 300,000 units exacerbating an already significant supply deficit from prior years and contributing to the growing affordability crisis.

These economic factors underscore the urgency of our top strategic priority as a company exiting conservatorship responsibly. I would also note that in 2020, we as a company we'll be expanding and increasing our focus on sustainability and ESG issues more broadly.

You will see some commentary about in the 10-K this year and look for us to have more to discuss over the course of the year. I'll just close with the topic of our preparation to exit conservatorship.

FHFA Director, Calabria has said that ending conservatorship will move us toward a mortgage finance system that meets the housing needs of American families, protects the American taxpayer and supports financial stability. We support those goals.

Like Director, Calabria we believe that exiting conservatorship will move us toward a mortgage finance system that meets the housing needs of American families, protects the American taxpayer and supports financial stability. We support those goals.

Like Director Calabria, we believe that exiting conservatorship will help us identify new opportunities to lower the barriers to creating, preserving and financing quality housing. We also believe it will enable us to identify market opportunities to incentivize private capital to invest in affordable housing solutions.

We took some significant steps in 2019 to help prepare for our exit. Importantly, we built an additional $4.6 billion in total equity bringing our capital buffer to $9.1 billion as of December 31st.

FHFA took another significant step in the past few days announcing it has selected a firm to advise it on a potential capital raise. We hope to actively begin a search for our own financial advisor in the coming weeks and we hope to report on our progress on that in the near future.

We also look forward to FHFA finalizing a capital rule that will provide guidance on our target capital level and set yet another milestone on the path at exiting conservatorship. I'm going to close by reiterating something I mentioned in the last earnings call.

FHFA will set out the milestones on the path to exit from conservatorship. But how fast we achieve them is up to us.

As a company and as individuals, we at Freddie Mac are committed to that goal and achieving it responsibly. We believe our mission requires it.

That concludes my prepared remarks. I thank you all for your time and I'm happy to take any questions.

If there are no questions at this time, we're happy to wrap and talk to folks next quarter.

I know. Thank you very much.

Thanks for joining us and we look forward to talking with you again next quarter.