Federal National Mortgage Association

Thank you, operator. And thank you to those who are on the call this morning to hear our results for our second quarter 2018 financial results.

Please note, this call may include forward-looking statements, including statements about the company's future financial and business results, actions, business plans and strategies. Future events may turn out to be very different from these statements.

The risk factors and forward-looking statement section in the company's second quarter 2018 Form 10-Q filed today and its 2017 Form 10-K filed February 14, 2018, describe factors that may lead to different results. As a reminder, this call is being webcast and recorded by Fannie Mae, and the recording may be posted on the company's website.

We ask that you do not record this call for public broadcast and that you do not publish any full transcripts.

I'd now like to turn the call over to Timothy Mayopoulos, Fannie Mae's President and Chief Executive officer; and David Benson, Fannie Mae's Executive Vice president and Chief Financial Officer.

Good morning, everybody. Thank you for joining us this morning to discuss Fannie Mae's second quarter results.

I'm joined this morning by David Benson, our Chief Financial Officer.

As we announced last week, I will step down as Fannie Mae's CEO by the end of the year, and I am delighted that as of August 6, Dave will become our new President.

Dave and I have worked together very closely for over 9 years, including the last 5.5 years, with Dave as our CFO. Our new CFO will be Celeste Brown, who joined our company 1 year ago following an 18-year career at Morgan Stanley.

Dave and Celeste are just 2 members of the broader leadership team and has been foundational to Fannie Mae's success. Our team is talented, experienced and focused on adding to that success in the years to come.

Since this is Dave's last call as CFO, I've asked him to start us off with a review of our quarterly results, then I will offer some thoughts about the company's progress. And we'll leave plenty of time at the end for questions.

Thanks, Tim. Before I get into this quarter's results, I would just like to say that all of those here at Fannie Mae are very grateful for your leadership as CEO these last 6 years.

I also appreciate the opportunity that you and the board had given me to serve in my new role as President of the company.

Now let me briefly summarize our quarterly results and call out a few highlights. For the second quarter, we reported $4.5 billion in net income and $4.5 billion in comprehensive income.

This compares with net income of $4.3 billion and comprehensive income of $3.9 billion for the first quarter of the year.

Our pretax income was $5.6 billion for the second quarter compared with $5.4 billion for the first quarter.

Our increase in net income for the quarter was driven primarily by higher credit-related income. This was notably impacted by the assignment of a sizeable population of our re-performing and nonperforming loans from held-for-investment to a held-for-sale designation.

This change in designation precedes the sale of the loans to other investors. Another factor boosting our credit-related income was the improvement in home prices seen during the quarter.

Partially offsetting these increases in net income, we experienced lower fair value gains in the second quarter compared to the first quarter, mostly due to lesser increases in long-term interest rates.

Based on our quarterly results, we expect to pay a dividend of $4.5 billion to Treasury in September 2018, and we will continue to retain a total of $3 billion in capital.

Beyond these top line numbers, let me call out a few highlights from the quarter. Overall, the second quarter performance reflects solid fundamentals in both our Single-Family and Multifamily businesses.

Both segments are managing and distributing risk in sustainable, efficient and innovative ways, and each has solid revenue streams driven by guaranty fees on our stable book of business.

We provided $125 billion of liquidity to the mortgage market in the second quarter through guarantees and loan purchases. This supported 298,000 home purchases, 179,000 home refinances and financing for 188,000 multifamily rental units.

This quarter, we remain the largest issuer of single-family mortgage-related securities in the secondary market.

The serious delinquency rate of our single-family book was 0.97% at the end of June. This compares to an SDQ rate of 1.16% as of March and 1.24% as of December 2017.

This rate has resumed its downward trend after its brief move upward after last year's hurricane season. We expect our single-family SDQ rate will continue to trend lower but may exhibit quarter-to-quarter fluctuations away from trend from time to time.

Finally, our Multifamily business volume in the first 6 months of the year was more than $25 billion, and we continue to be a leader in affordable and workforce rental housing. In fact, more than 90% of the multifamily units we supported in the second quarter were affordable to families earning at or below 120% of the area median income.

You can find more information on the drivers of our second quarter results in our press release and our Form 10-Q, which we filed today.

With that, let me turn it back over to Tim.

Thanks, Dave. Before taking your questions, let me provide some thoughts on the company as a whole and on our progress.

As I've said on previous calls, our quarterly results reflect a business strategy that is focused on our customers. Our results are also the product of a decade of hard work strengthened both Fannie Mae and housing finance.

Nearly 10 years ago, Fannie Mae entered conservatorship, the depths of the financial crisis. For Fannie Mae, it has been a decade of reform and fundamental change.

During these 10 years, we have achieved more than most people thought possible, are remaining focused on our mission and purpose. It helped millions of people stay in their homes in the wake of the crisis and helped millions more buy refinanced and rent homes in the years of recovery.

We returned to profitability in 2012, and it paid nearly $50 billion more in dividends to treasury than we have received in taxpayer support.

We built a strong book, improved our business model and reduced risk to taxpayers. We have reduced our retained mortgage portfolio, reducing the company's risk exposure.

Today, guaranty fees are a stable and reliable primary driver of our [ loan book ].

We have evolved from being a company that buys and stores credit risk to one that also distributes credit risk, attracting global capital to the [ most ] mortgage market.

Over the past 5 years, we've transferred a portion of the credit risk of nearly $1.4 trillion of single-family loans, measured in unpaid principal balance at the time of the transaction. As of the end of June, 35% of our single-family conventional guaranty book of business was covered by a credit risk transfer transaction.

At the same time, we are introducing easy-changing innovations for customers, investors and other partners. These innovations will make housing finance better, safer and more efficient for future generations.

We are testing new technologies to make the mortgage process simpler and more certain. As we do so, we are partnering with customers and putting them at the center of everything that we do.

Frankly, in the past, we too often develop solutions based on what we thought our customers should want. Today, we use design thinking and customer co-development panels to create the solutions they actually want.

Step-by-step, we're advancing toward the day of the fully digital mortgage. Deal-by-deal, we're enhancing our position of world leadership in green financing for our multifamily customers.

And last week, we issued the market's first-ever securities index to the secured overnight financing rate, a new benchmark alternative to LIBOR.

We are also working with new and different kinds of partners on innovations to make our communities more sustainable. We have convenient partners across the full spectrum of housing to address our nation's most important housing challenges such as the crisis in the supply of affordable housing.

Combining all these efforts is our core commitment to creating new opportunities for homeowners and renters and to making housing finance stronger, safer and more sustainable.

The changes we put in place have resulted in a company far removed from the one that I came to. It's a company with a strong sense of stewardship but also of commercial mindset, flowing agility and a willingness to try new approaches.

It is a Fannie Mae that is in a stronger position to help tackle our important housing challenges.

I want to thank our entire team at Fannie Mae for their great work and leadership that has made this progress possible. I also want to thank Dave for agreeing to step in as President starting next week.

I am proud of what we've accomplished and what we will accomplish going forward.

With that, let me thank all of you for joining today's call, and we'll be glad to answer any questions you may have.

I wondered if you could tell me -- you mentioned that the reperforming loan classification got changed, so that played a role in the increase this quarter. I wondered if you could tell me why that classification changed.

Sure. This is part of our regular course of business, but I'll let David explain the details to you.

Sure. We have been in the market selling our nonperforming and reperforming loans for the last few years.

Something that you really need to do is once you've determined that there's a population of loans that you actually have on your book that have been held in -- basically, they've been held on the basis of held-for-investment, you need to -- once you've made the determination that you're going to -- you intend to sell them, you actually have to put them into a different classification called held-for-sale. So it's about the intent.

Once you do that, the intent, then you have this accounting classification difference that occurs. And then you can go to market and you go about and you can sell the loans.

But it's about -- the interest here is what is your intent? Do you intend to hold the loan or are you intending to sell them?

Once you've made the determination that you intend to sell them, they have to be put into the new classification. The reason for the change that you see and that is you go from reserve accounting in -- the reserve accounting that was in the held-for-investment state into stable.

You've actually charged off the difference in price between where you held the loans at the original price to what the market value is, and that, that charge-off is taken. So you literally go from reserve accounting into a charge-off state.

Is -- do you kind of sell them on a routine basis? Or I wondered if there was a particular development that made the intent to sell those loans come up.

You know what...

Yes. We've actually been doing this now for the last -- it's been going on for 2, 3 years pretty actively.

The sales occur every few months or so. They take quite a bit of work on the package up these loans.

It's a complex process to come to market, and we've been doing this now for a few years. I think the reason that this particular one had a larger impact is because the actual sale that we did, which we commenced in July when we actually did sell the loans in the market, was reasonably sizeable.

It was a large package.

Okay. So it sounds like there is usually this process as part of the regular process of you amass a certain volume and then come to market.

So there wasn't like a development that made you want to sell, in particular, this quarter, but it was the package that you'd assembled was actually a larger size

that you were able...

That's correct. It was a large-sized package, and therefore, it had an outsized impact on the quarter's result.

Okay. Thank you, operator.

Appreciate the question from Bonnie. And thank you all for dialing in.

We'll talk to you in the next quarter. Thanks so much.