Federal Home Loan Mortgage Corporation

Thank you. Good morning, and thank you for joining us for a discussion of Freddie Mac’s third quarter 2020 financial results.

We’re joined today by our CEO, David Brickman; General Counsel, Ricardo Anzaldua; CFO, Chris Lown; and CAO, Jerry Weiss. Before we begin, we’d like to point out that – Freddie Mac executives 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 vary materially from its expectations. A description of those factors can be found in the company’s quarterly report on Form 10-Q filed today.

Freddie Mac executives may also 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 the upcoming election, public policy or legislation concerning Freddie Mac.

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

At the end of Mr. Brickman’s prepared comments, we will open the call for questions that pertain only to the earnings statements we just released.

As a reminder, this call is from the media and only they may ask questions. With that, I’ll turn the call over to Freddie Mac’s CEO, David Brickman.

Thank you, Jeff. Good morning, and welcome to our third quarter earnings conference call.

It’s a pleasure to be speaking with you today about Freddie Mac’s strong performance and the work we’ve done to support the housing market and families affected by the pandemic. While we continued to focus on stabilizing the market, we also drove important work in other areas from advancing sustainable housing to making the smooth transition to a new reference rate.

As a result, we again demonstrated the vital role we play in good times and bad acting as a countercyclical force in times of crisis and bringing private-market solutions to difficult challenges in all economic environments. I think you’ll see those themes woven through the three topics I address today.

First, I’ll update you on our ongoing effort to provide stability during the pandemic, while we continue working to make the housing market better and more accessible. Second, I’ll discuss our financial results for the quarter.

Finally, I’ll preview our outlook for both the single-family and mutlifamily markets over the near to medium-term. First, let me provide an update on pandemic-related work and other actions we’ve taken to stabilize and improve the housing market.

Few companies are as well-positioned as Freddie Mac to blunt the housing impact of COVID-19, and we continued to do just that. Our data shows that the vast majority of Freddie Mac borrowers who have fallen more than 60 days behind on their mortgage payments during the pandemic 96.1% to be exact have enrolled in forbearance, and that figure is even higher among minority borrowers at 97.6%.

Since the outbreak began, approximately 639,000 single-family borrowers have used our forbearance option, and 300,000 of those have already exited forbearance. In the third quarter, nearly 100,000 borrowers moved directly from forbearance to a payment deferral, bringing them current on their mortgage.

In the multifamily space, owners are currently taking advantage of Freddie Mac forbearance on 1,225 properties, and as a result, more than 100,000 families are protected from eviction for non-payment of rent. We launched a number of online tools to help homeowners and renters get the assistance they need during this difficult time.

I’m pleased to note that more than 15 million families have used these resources, which can be found by visiting myhome.freddiemac.com. We also continued to provide lenders, borrowers and others flexibilities that helped ensure the mortgage markets continued to operate well, such as allowing electronic documents in lieu of employment verification and using appraisal alternatives to reduce the need for in-person inspections.

All of this combined with historically low rates, enabled us to purchase record volumes, providing an unprecedented level of liquidity to families across the nation. It’s also important to note that we did this while distributing risk into the private market.

We’re pleased with the results, which have helped ensure the housing market continues to be a source of strength in an otherwise troubling economy. The housing market’s strength is evident in a range of economic indicators, including purchase applications were up 24% year-over-year in the recent reporting period.

Existing-home sales rose 9.4% in September to a seasonally adjusted annual rate of 6.54 million, the highest since May 2006. And the Commerce Department reported Monday that despite the modest increase in September, sales of new homes increased 32.1% from a year earlier.

Clearly, housing has been very strong. And as you’ll see later in our financial reporting, we have benefitted from it.

We have also contributed to that strength by enabling the mortgage market to function seamlessly. Our pandemic-related activities in the third quarter went hand-in-hand with the day-in, day-out work of making our housing finance system better for everyone.

We’ve done this by focusing on affordability, industry leadership, and diversity inclusion. We pressed forward on affordability in the quarter, for example by announcing two additions to our Multifamily Impact Bond Offerings, Sustainability Bonds and Social Bonds.

These offerings are aimed at attracting capital to support economic mobility for residents and economic growth for communities, consistent with Freddie Mac multifamily’s long history of supporting sustainable communities through its financing for affordable and workforce housing. In the quarter, we continued playing our leading role in the difficult and complex transition away from LIBOR as an index rate, an issue that I’ve mentioned in the past.

As a member of the Federal Reserve’s Alternative Reference Rates Committee, we’ve provided critical support for the move to the Secured Overnight Funding Rate, or SOFR. Over the past few months, we rolled out new SOFR-indexed collateralized mortgage obligations, started purchasing Multifamily SOFR loans, continued to issue SOFR-indexed K deals and issued a new SOFR-indexed Single-Family credit-risk transfer or CRT deal this month.

Also, we intend to roll out a new Single-Family adjustable rate mortgage product in the fourth quarter. The first SOFR-indexed CRT transaction was significant for us and for the market.

It was one among several Freddie Mac CRT offerings coming after a pandemic pause on those offerings by both GSEs. Freddie Mac’s third quarter issuances, many of which were upsized due to strong investor demand, demonstrated Freddie Mac’s ongoing commitment to CRT and re-energized the market for an asset class we pioneered.

Also in the third quarter, we continued to address the troubling disparities in economic outcomes we see across our nation. It is abundantly clear to me, and I think to many of you and others throughout our industry, that we need to rise to the challenge to do more to counteract the heartbreaking gap between black and white Americans in homeownership, which is currently wider than it was in 1960.

As written, our mission focuses on liquidity, stability and affordability. Yet I believe that because circumstances have irrevocably changed in the last year, our mission should now focus on liquidity, stability, affordability and equity.

To achieve that goal, our work generally falls into three areas. First, we are helping people of color enter and prosper in our industry, including at Freddie Mac, for example by working with organizations that recruit, train and place students from Historically Black Colleges and Universities into internships with mortgage and real estate companies.

We also partner with the Hispanic Scholarship Fund to leverage their Career Services for sourcing diverse talent, which helped drive a 10% increase in Hispanic applicants for our college analyst programs. Second, we are helping more businesses owned by people of color prosper, for instance by actively growing and developing our diverse supplier pipeline through our Supplier Academy, a training program which helps vendors network with company leaders, learn how to do business with Freddie Mac and grow their business not only with us, but with other companies as well.

More than 40 diverse suppliers have graduated from our Supplier Academy and, to-date, nearly 40% of them have competitively bid and earned a contract with us post-graduation. We’re also bringing diverse suppliers into our capital markets transactions through a broad-based program that provides training, access and opportunities to win business.

To-date, we’ve conducted more than 50 trainings with diverse suppliers to help enhance the knowledge of our programs. We’ve also engaged four different diverse suppliers to serve as underwriters on various Multifamily transactions this quarter.

And Freddie Mac was among the first firms to use a diverse supplier as a co-lead underwriter on a debt issuance indexed to SOFR. And finally, we are focused on helping more families of color achieve homeownership, which is at the core of what we do.

This includes through CreditSmart, our multilingual financial education curriculum designed to help consumers build and maintain better credit and make better financial decisions. We also are aggressively supporting and promoting our suite of very successful low down payment loan products, including our HomePossible and HomeOne mortgages and HFA Advantage, designed to work in tandem with state housing finance agency programs to support homeownership.

We’re also exploring alternative credit for underbanked populations and renters. And we are working with a wide range of business partners and non-profit organizations engaged in activities and in communities across the country to promote homeownership and community revitalization.

And we also are supporting innovative research targeted toward lowering housing costs and increasing housing supply. This is just a sample of the many initiatives we are working on as part of our broad-based efforts to advance the cause of equality.

Now, let’s look at our financial and business results in a third quarter that saw historic Single-Family volume and above-average Multifamily activity. Freddie Mac earned comprehensive income of $2.4 billion in the quarter, up 26% or $0.5 billion from the prior quarter, primarily driven by higher net revenues from the company’s growing guarantee portfolios, upfront fee recognition and new multifamily business.

Credit-related expense declined compared to the second quarter. Provision for credit losses was lower, as realized house price growth in the third quarter was robust and estimates of expected credit losses related to the COVID-19 pandemic have started to stabilize.

Credit costs related to portfolio growth and a lower benefit from expected credit enhancement recoveries also affected credit-related expenses. Total equity increased to $13.9 billion, up from $11.4 billion at the end of the second quarter, representing a 22% increase in our capital.

It’s important to note that this level of capital puts Freddie Mac in a very solid financial position. It is enough that we would not have needed a draw in any of the nine hypothetical quarters contemplated by the last published Dodd-Frank stress test’s most plausible severely adverse scenario.

As I said earlier, Single-Family had a record quarter. New business activity was $337 billion, reflecting unprecedented home purchase and refinance activity, while new Multifamily business activity was $18 billion.

The Single-Family guarantee portfolio grew 11% year-over-year, and Multifamily’s portfolio grew by 14% despite a challenging environment for rental properties. Credit quality remained strong for both Single-Family and Multifamily new business activity, with weighted original average loan-to-value ratios of 71% and 66%, respectively.

While still low by historic standards, the serious delinquency rate for Single-Family increased to 3.04%, from 2.48% in the prior quarter driven by loans in forbearance due to the pandemic. The Multifamily delinquency rate, which does not include loans in forbearance, increased from the prior quarter but the rate remained very low at 0.13%.

Most importantly in the quarter, we continued to execute on our mission, making home possible 1.3 million times. That includes funding more than 1.1 million single-family purchase and refinance loans, including more than 137,000 to first-time homebuyers.

This is the highest number of first time homebuyers we’ve served since 2010. And we helped multifamily borrowers finance more than 185,000 units, 96% of which were affordable to renters making 120% of area median income or less.

Turning to our outlook for the housing market, while much uncertainty remains, we expect the fundamentals of the Single-Family market to remain strong, while the Multifamily market will likely see modest weakness over the short-term. For Single-Family, we expect mortgage rates to remain near their record lows for the remainder of this year.

The refinance segment of the market remains strong, accounting for about two-thirds of our forecasted $3.6 trillion in total originations for 2020, and we’re expecting purchases to increase to about $1.4 trillion, resulting in over 6 million total home sales for this year. We’re also forecasting 2020 house price growth to remain strong with an annualized rate of 5.5%.

Short-term on the Multifamily side, vacancy rates could increase as much as 2 percentage points by year end, and rents may decline by 1.2% to 1.7%. However, forecasts are generally improving as more data becomes available.

We expect the multifamily market to continue to do well in the medium to long-term, but that ultimately will depend on resumption of economic growth. However, the core driver is the same as it has been for some time, inadequate supply and the rising cost of single family homes, which limit access to homeownership and drive demand in the rental market.

To ensure that all families can find quality, affordable housing, especially, vulnerable low income families, we must ensure the multifamily lending market remains liquid and stable through the current economic crisis. As other debt providers have stepped back from the multifamily market, Freddie Mac has stepped forward.

This is precisely the countercyclical support borrowers need from us, and for which we are almost uniquely suited. While the future may be uncertain, I have complete confidence in Freddie Mac’s ability to meet its challenges.

That confidence flows from the many strengths of this company, not the least of which is an employee base utterly committed to its mission of providing liquidity, stability, affordability and equity to borrowers, renters and lenders in the U.S. housing finance system.

Our response to the pandemic showed we’re an organization that can rapidly adapt to the realities of the day while continuing to prepare for the future. I am very proud of our performance and ready for our next chapter as we work to exit conservatorship.

With that, I’d be happy to take your questions.

Thanks for taking my call.

My pleasure.

A couple related questions, I think, one is about on your 10-Q you talked about investment gains being up essentially 50%. Could you clarify how that happened.

Sure. Be happy to, I’m going to have Chris Lown address that.

And those investment gains primarily came out of our Multifamily business, which was what you saw was a return to normalcy in that business. And therefore the investment gains as a result that accrued there.

So it was primarily multifamily driven, but also out of the single-family as well. You saw pretty significant return to those markets from a pricing perspective and therefore that’s the result.

Okay. And then maybe it’s related – maybe it’s that – I also noticed that your net interest income, you talked about a higher upfront fees being recognized, what does that refer to?

Well, a lot of that has to do with the amortization of the portfolio, as you can see in the market that refinance volumes and volumes generally are in near record levels. And what you therefore see is high liquidation rates that are accruing through our portfolio.

As a result of those high liquidation rates, what you realize is faster amortization of fees that were paid on those loans versus what would have been modeled into those loans on a more normalized basis. So it really has to do with a much higher liquidation rate, which allows us to realize those fees in a much quicker manner.

And here we’re talking about the LLPA…

Yes.

All right. Excellent.

I think that two questions I had. Thanks for taking the call.

Thank you.

Good morning.

Good morning.

You mentioned the credit risk transfer. How has that gone over with investors lately?

Well, I’ve talked to the market, because of the pandemic that those structures are not as appealing as they were a year ago. How are you – and especially since you are counterparts that’s Fannie Mae have seemed to us to shoot the market altogether?

Yes. Well, for us, we just issued our DNA five transaction, the price and closed in October.

And we had the best execution as in the lowest spreads and we’d had since the pandemic began. And I know had – I’ll say dozens of investors participate all classes were oversubscribed and got we viewed as very favorable execution.

You compare it to a year ago and I’d have to go back and see where exactly we were a year ago, we’ve seen continued improvement in that market over the last several months. And we’re very comfortable with where we see CRT spreads now and where we think we can execute a credit risk transfer transactions.

Yes. I would just highlight, well, there was a hiatus in the CRT market around since the pandemic in April, May.

What we’ve seen is that continued to build back to pre-COVID strength. And as David said, we’re seeing executions at or near all time tights, new investor interest, strong interest demand over subscription.

So clearly still remains a very strong interest in these structures and in these products.

All right. Okay, thank you very much.

You’re welcome. Thank you for the question.

No, just thank everybody for joining us.