Federal National Mortgage Association

Hello, and thank you all for joining today's media call to discuss Fannie Mae's first quarter 2021 financial results.

Please note this call may include forward-looking statements, including statements related to the company's business and financial results, its future loss mitigation activities and their outcomes, the impact of COVID-19 pandemic and recent amendments to the company's preferred stock agreement with treasury, economic and housing market conditions, the company's capital requirements and the company's business plans and strategies. Future events may turn out to be very different from these statements.

The risk factors and forward-looking statements sections of the company's first quarter 2021 Form 10-Q filed today describe factors that may lead to different results.

As a reminder, this call is being 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.

I'd now like to turn the call over to Fannie Mae Chief Executive Officer, Hugh R. Frater; and Chief Financial Officer, Celeste Mellet Brown.

Thank you, Pete, and good morning, and thank you for joining us to discuss our 2021 first quarter results. This morning, I will discuss some key themes for Fannie Mae as we move through this important year, and then I'll hand it over to Celeste to discuss our results in depth and we'll leave time at the end to take your questions.

As I reflect on where we are, 2 things are clear. First, while this spring has brought hope on the public health front, the fact remains that the COVID-19 pandemic is still with us.

The effects on families and our economy will be with us for some time, and they will present both challenges and opportunities for homeowners and renters. That's why our priorities in 2021 are to continue doing all we can to help borrowers and renters meet those challenges and opportunities and to continue supporting our own employees through these uncertain times.

The second item that is clear is that our first quarter results demonstrate Fannie Mae's ability to simultaneously deliver on our mission, generate reasonable returns and focus on safety and soundness, including rebuilding our capital base. As I've said many times, these factors may sometimes be intention but, in my view, they are not necessarily in conflict.

In fact, I believe they complement one another. Our mission is to provide liquidity and stability and to remote access and affordability.

To fulfill this mission, we need to be safe and sound. To be safe and sound, we must be properly capitalized.

And to attract capital over time, we must be investible and generate a reasonable return for our shareholders.

In the first quarter, we, by and large, achieved this vital balance, and we will continue to pursue that balance going forward. We earned $5 billion of net income in the first quarter.

We provided $422 billion for mortgages that helped people across America refinance a home, purchase a home or finance rental property. This last quarter was the second biggest nominal volume quarter in our history.

And we increased our net worth by $5 billion to $30.2 billion. This represents progress in rebuilding our capital base, which is key to our future.

However, there is one important caveat. Given the continued surge in volume, our net worth to asset ratio barely moved.

And as Celeste will explain, our capital requirement actually increased this quarter. In my view, this under capitalization is unsustainable, and it exposes the taxpayer and the housing finance system to risk.

I want to close by reiterating a few themes I hit on in February. These themes will remain central to Fannie Mae's story this year and for some time.

Fannie Mae and our partners throughout housing know that building a housing system that is more affordable, fairer and more resilient is a long-term project. Our housing system has gaps -- racial gaps, access gaps, supply gaps -- that must be bridged.

We want to be a part of building that bridge.

The housing market has for much of the past decade served many middle- and upper-middle class homeowners and apartment owners very, very well. But in many communities, the supply of housing for moderate- and low-income families is at crisis levels.

That's why we are putting Fannie Mae's mission first with a focus on how we can improve the housing system to better serve borrowers and renters. That means all borrowers and renters, including people who have historically been left behind by our housing system, such as Black people and other people of color.

The housing and mortgage markets have stood up very well to the shock of the pandemic. Yet the pandemic has also highlighted the ways in which our housing finance system continues to fail many of our working families.

Serving these families better will require a change from today's status quo. We cannot just accept things the way they are, not us, not the mortgage industry, not the homebuilders, not the realtors, not the apartment owners, not any of the stakeholders in this vast ecosystem that has performed so well economically in the past year.

We welcome, for example, this week's announcement by FHFA of RefiNow, a new refinance option to make it easier for qualifying low-income borrowers to reduce their housing costs. This is just one small step, and we hope our partners in the industry will embrace the challenge.

The past year has shown that we have the capacity, the talent and the tools to help imagine steps like this and make can succeed, and that with the right partnerships and tools, we can build a better housing system. Today, we are serving homeowners and renters with this goal in mind, and we are prepared to do more tomorrow and then more the day after that.

I'll turn it over to Celeste now who will take us through the numbers. Celeste, take it away.

Thanks, Hugh, and good morning. Before I speak to our financials, I'll take a moment to reflect on the first quarter.

On one hand, we rapidly implemented programs that provided much needed relief to homeowners and renters who are adversely, in some cases severely, impacted by the pandemic, allowing them to stay in their homes. On the other hand, we handled record volumes of mortgage prepayments and new acquisitions as borrowers took advantage of low interest rates in a booming housing market.

These contrasting circumstances of the pandemic for borrowers and renters underscore our role in supporting America's mortgage markets in good times and bad. And what often goes unremarked upon is how little disruption there has been to the mortgage market despite these stresses and strains.

This reflects the seriousness with which we take our charter responsibilities and the scale and excellence of the people at Fannie Mae whose hard work and diligence has made it possible for America's homeowners and renters to purchase, refinance, rent or get real, urgent financial relief during one of the most challenging periods in our lifetime.

Let me turn to our financial results. It was another good quarter for Fannie Mae.

The housing market remained robust in the first quarter with an unseasonably strong 3.4% increase in home prices amid continued low interest rates. First quarter mortgage acquisitions of $422 billion, the second-highest level in our history, was down 7% from the record fourth quarter.

The guaranty book grew 2.4% to $3.8 trillion. While purchase volumes declined due to seasonal reasons, refinancing activity remained near fourth quarter's record levels.

Refinancing was 75% of first quarter single-family acquisitions compared to 71% in the fourth quarter and 64% a year earlier.

First quarter net revenues of $6.8 billion declined 6% from $7.2 billion in the fourth quarter, largely due to lower amortization income. However, despite these lower revenues, comprehensive income of $5 billion increased approximately 9% from last quarter, largely as a result of fair value losses in the fourth quarter shifting to gains this quarter, partially offset by lower credit income.

The shift from fair value losses to gains resulted largely from the implementation of hedge accounting in January. This benefit from hedge accounting arose because it allows us to better match the timing of accounting gains and losses from our derivative hedges with the underlying economics of the loans or funding debt we are hedging.

Before hedge accounting, we reported the fair value of the derivative used to hedge interest rate risk in fair value gains and losses. Now we net these derivative hedges with the fair value gains or losses of the loans or funding debt they are hedging and report them in net interest income.

Hedge accounting improved first quarter pretax income by approximately $1.2 billion. Although hedge accounting reduces the earnings volatility related to interest rate movements in any given period, it does not impact the amount of interest rate-driven gains or losses we will ultimately recognize through our earnings over time.

Credit was also a significant driver in the quarter. We had $770 million in credit-related income in the first quarter compared to $1.4 billion in the fourth.

Above-average home price growth and a doubling of our full year 2021 home price growth forecast were the primary factors in the reduced credit allowance. That was partially offset by the impact of higher actual and projected interest rates.

Now let me turn to our segments. First quarter Single-Family net income of $4.4 billion increased approximately 11% quarter-over-quarter as lower credit-related income and a 5% decline in net revenues from lower amortization income was more than offset by a shift from fair value losses to gains, as described previously.

Single-Family's average conventional guaranty book grew by 2.4% from the fourth quarter to $3.2 trillion. First quarter acquisitions declined $25 billion to $400 billion driven largely by a seasonal decrease in purchase acquisition.

However, refinance volume of $301 billion in the first quarter remained unchanged from the fourth.

You will recall that certain restrictions on our single-family acquisitions were included in the January amendment to our senior preferred stock purchase agreement. So far, these have had minimal impact on acquisitions, but we continue to work on implementation of the new restriction.

First quarter average charge fees on single-family acquisitions, net of TCCA, grew 4.2 basis points (sic) [ 2.2 basis points ] from the fourth quarter to 48 basis points. This increase reflected our implementation of the adverse market refinance scheme in December.

The credit quality of Single-Family's acquisitions remained strong, helped by the high share of refinance volumes that typically have better credit profiles. First quarter loan-to-value ratio, or LTV ratio, on refinance acquisitions of 63% was the lowest since 2011.

Total first quarter weighted average acquisition LTV ratio improved by 2 percentage points from the fourth quarter to 68%, while the weighted average FICO score decreased by 1 point to 761. The single-family serious delinquency rate was 2.58% in the first quarter, down from 2.87% last quarter due to the ongoing economic recovery and the decline in the number of the company's single-family loans and COVID-19 related forbearance plans.

Excluding loans in COVID-related forbearance, the SDQ rate would have been 66 basis points in the quarter, flat with the fourth.

Turning to Multifamily. First quarter net revenues of $873 million fell 9% from the fourth quarter due to lower net interest income, which drove a 4% net income decline to $599 million.

I mentioned last quarter that given strong demand, we have taken certain actions, including raising prices, to manage our pipeline and remain under the FHFA's acquisition cap. As a result, the average charge guaranty fee on our multifamily book of business increased to 76 basis points.

Multifamily's first quarter series delinquency rate fell 32 basis points to 66 basis points from the fourth quarter and from a peak of 125 basis points in July. The improvement reflects loans exiting forbearance that are performing under repayment plans or were reinstated through either becoming current or through modification.

Excluding loans and forbearance, the first quarter multifamily SDQ rate would have been 3 basis points, consistent with last quarter.

Now let me give you an update on COVID-related forbearance. The FHFA extended the single-family COVID-19 forbearance to a maximum of 18 months.

While we are optimistic that a significant number of loans in COVID forbearance will be resolved successfully, there remains some risk.

In Single-Family, approximately 1.3 million loans, or 7.9% of the guaranty book based on loan count, have entered forbearance since the start of the pandemic. We now forecast that our lifetime take-up rate will increase an additional 20 basis points to 8.1%, down from our 8.5% expectation last quarter.

By the end of the first quarter, 68% of loans that had been in forbearance have exited with predominantly positive outcomes. Approximately 400,000 loans, or 2.5% of the single-family guaranty book based on loan count, remained in active forbearance at the end of the first quarter.

Of these loans, about 10% were current.

For Multifamily, approximately 1.3% of the current guaranty book based on UPB had entered a forbearance agreement since the start of the pandemic. As a result of continued low take-up rates and further economic stimulus, we have reduced our forecast of the lifetime multifamily loan forbearance take-up rate to 2%, down from 5% in the fourth quarter.

Over 70% of the $5.4 billion of UPB of multifamily loans that have entered forbearance to date has since successfully exited and either reinstated, liquidated or entered a repayment plan. Only 23 basis points of the multifamily guaranty book remained an active forbearance at the end of the first quarter.

As we have previously noted, we accrue interest on COVID-affected delinquent loans when we have reasonable assurance of being able to collect. Our evaluation of whether collection is reasonably assured considers the probability of default, the current value of the collateral and any proceeds that are expected from contractually attached mortgage insurance.

As of March 31, we have accrued $1.8 billion of interest on past-due loans in forbearance outstanding, against which we have recognized $185 million credit provision. Another impact of COVID forbearance in the first quarter was our advancing $622 million of single-family principal and interest, primarily related to past-due loans in forbearance to ensure timely payment to MBS investors.

Looking forward, if the single-family loan does not resolve and either remains nonperforming for a prolonged period or enters a flex modification, then we are generally required to purchase it out of trust. At quarter end, $88 billion of single-family UPB was in forbearance, including $70 billion, that was 90-plus days delinquent.

We currently expect that some loans in forbearance at the end of the first quarter may eventually need to be purchased out of trust, mostly in 2022. While we do not expect these purchases to have a material impact on our financials, largely because our credit allowance already reflects expected lifetime losses for these loans, these purchases will be added to our retained portfolio.

Our net worth at the end of the first quarter was $30.2 billion, an increase of $5 billion from the fourth quarter. Our estimated total capital requirement under the new Enterprise Regulatory Capital Rule would have been approximately $190 billion, of which approximately $140 billion would need to be in common equity Tier 1, or CET1, capital.

Regulatory buffers represent approximately $75 billion of these requirements. Our estimated capital requirement grew by about $5 billion quarter-over-quarter as a result of book growth and a reduction of benefits from credit risk transfer transactions.

We are permitted to retain earnings for the foreseeable future under the terms of the most recent senior preferred stock purchase agreement amendment, and we continue to evaluate how to best meet our capital requirements in a timely and prudent manner.

Looking at the year ahead, we continue to expect strong real gross domestic product, GDP, and employment growth as the pace of vaccination programs improves and many COVID-related restrictions are being lifted. Additionally, we anticipate the recently passed stimulus bill and the continued buildup of household savings will support greater consumer spending levels.

Nonetheless, economic risks and uncertainty remain. The possibility of new COVID variants emerging, the extent of consumer willingness to return fully to pre-pandemic economic activity, the impact of potential supply chain disruptions and the pace of future inflation all represent risk to our outlook.

Home sales were minimally affected by rising mortgage rates through the first quarter, though a further jump in interest rates is a risk. We expect ongoing tight housing supply to drive strong home price growth of nearly 9% this year, but the lack of for-sale inventory could remain a headwind for home sales.

While we project mortgage purchase originations to increase by about 15% to $1.9 trillion in 2021, we expect total originations to decline by around 12% to $4 trillion as we expect refinance demand to decline.

We expect lower refinance volumes will affect our financial results as fewer loan prepayments will lead to lower amortization income. Record refinancing volume has driven significant growth in amortization income in the last year.

In the first quarter, net amortization was $2.5 billion compared to $1.5 billion in the first quarter of 2020. This growth in net amortization occurs as mortgage prepayments accelerate the recognition of revenues that would otherwise have been amortized into our income statement over the contractual life of the mortgage.

As I noted, 75% of our single-family acquisitions in the first quarter and about 2/3 of our 2020 acquisitions were refinances. By comparison, refinances typically accounted for closer to 40% of acquisitions in 2017 to 2019.

We believe that refinance volume will remain elevated for the first half of 2021 but thereafter will begin to decline as refinancing returns to more normalized levels.

Now let me turn it back to Hugh so we can go to questions and answers.

Thanks, Celeste. We're ready for your questions.

And we will go to our first question from Bonnie Sinnock with National Mortgage News.

I wanted to ask about 2 things, if I could. One was about the mention of addressing some of the racial gaps in the market.

I wondered if you had particular initiatives or programs that reflect that? And the other one was related to the caps and some of the pricing adjustments.

I wondered if you could tell me a little bit about how your handling that?

Okay. Terrific, Bonnie.

It's Hugh, I'll take the first one. There are a lot of different things in-flight on the racial equity topic.

The causes of structural discrimination and inequity are complex. And as you know, some of them stretch back decades, maybe even centuries, depending on how you look at it.

Whether it's thin credit files, lower FICO scores, higher LTV ratios, structurally lower home values, when communities of color borrows, they generally pay a higher mortgage cost. But as I've noted before and in other forums, solutions defy the actions of a single organization.

It will require partnership with the mortgage industry, the advocacy community, regulators, local national policymakers. We care a lot about addressing inequity in housing.

We're intent on doing our part to seek sensible solutions with all relevant groups, and we're redoubling our efforts on what we at Fannie Mae can do now.

we work to safeguard mortgage practices from unintended discrimination, and we're very fortunate to work in a culture where our employees make sure lending in housing a priority.

So I would say, generally, stay tuned. The RefiNow effort, which was announced the other day, is an effort to help low- and moderate-income borrowers take advantage of monetary stimulus in the form of lower rates.

That's just one of many things that we have in play. And so I would just encourage you to watch this space for additional news, but it is an area that we intend to make significant progress in.

But of course, only -- we can only do it if we're working in concert with the entire industry.

I think your second question was on the PSPA, I believe, and those amendments and certain restrictions. There's a 7% cap on second homes and investor properties.

We have yet to see any material impact on acquisitions as a result of the amendment, but we're taking steps and we might consider additional revisions to our business activities in order to ensure compliance with those covenants. And those covenants, we're currently not in compliance with those as disclosed in the Q.

To help us come into compliance with the 7% cap on second homes and investor properties, we've urged all single-family lenders to work cooperatively with us to manage their sale of these loans to us to be at or below 7% of their total year-to-date UPB.

What this means for lenders, if they're below the 7% limit for year-to-date sales, we've requested that they please maintain their sales of loans secured by second homes and investor properties at or below their current year-to-date levels. If they're above the 7% limit for year-to-date sales, we requested that they please decrease their sales of these loans secured by second homes and investment properties down to the 7% level by June 1, 2021.

For lenders, Fannie account team will work with them to manage their sales of these property types to help us ensure that their loan sales are at or below the needed threshold, and we'll continue to monitor deliveries of the second home and investment property loans in order to address the restrictions in the PSPA amendment and may announce other changes to our clients in the future. And I hope that answers your question.

So is there a pricing change made in conjunction with those caps as well? That's what it sounds like, but I want to make sure I heard that right.

Bonnie, were you referring to my comments on the multifamily managing within the multifamily cap?

Okay. Maybe that was the multifamily cap.

Okay. Got you.

Yes. We manage that business, yes, very differently.

It's -- we're dealing with commercial borrowers. We've always managed very -- the pricing has always been very dynamic depending on demand and supply.

Obviously, we have limited supply. And given that some of the other market sources had been out of the market, we've increased our prices to slow down some of the demand, and we've been able to maintain that.

I just was wondering if you had an idea or estimates for what the pickup rate will be on the refinance program that you just announced.

Yes. Andrew, thanks for the question.

No, we don't really know. We hope that working with our industry partners that it'll be substantial but, at this point, we don't know.

Well, thank you, everybody, for joining us today. There's a lot going on.

We look forward to chatting with you next time. Thanks.