Federal National Mortgage Association

As a reminder, this call is being webcast and recorded by Fannie Mae, and the recording may be posted on the company's website. This call cannot be recorded for broadcast by any participant other than Fannie Mae.

[Operator Instructions]

I'd now like to turn the media conference call over to your host, Tim Mayopoulos. Please go ahead.

Thank you very much. Good morning, everyone.

Thanks for joining us today as we share our third quarter 2015 financial results.

We had another strong quarter of financial performance with strong business fundamentals. These results also punctuate our ongoing progress in bringing positive change to the housing finance system, including innovative technology solutions for customers and improvements to our business model that reduce risk for taxpayers.

I'm proud of our leadership in these areas, and we expect to be a catalyst for more positive change going forward.

Let me summarize our third quarter results and then update you on some specific areas of progress. We reported net income of $2 billion and comprehensive income of $2.2 billion for the third quarter of 2015.

This was our 15th consecutive quarter of profitability. Our book of business is very solid, providing stable guarantee fee revenue, which in recent years has become a primary driver of our overall revenue and an increasing portion of our net interest income.

This is a result of increases to our guarantee fees and decreases to our retained mortgage portfolio, which, if you remove the loans that we bought out of our mortgage-backed securities trust because of delinquency, is down from $900 billion at its peak to less than $200 billion today. We expect this trend to continue.

As we noted in our 10-Q filing, we expect to remain profitable on an annual basis for the foreseeable future. Nonetheless, there are exogenous factors that we do not control, such as changes in interest rates or home prices.

These factors can result in significant volatility in our financial results from quarter-to-quarter or year-to-year. We saw some of that volatility this quarter as we had net fair value losses compared with net fair value gains in the second quarter.

Based on our strong third quarter results, we expect to pay Treasury another $2.2 billion in dividends by the end of December, bringing total cash dividends paid to Treasury to $144.8 billion, compared with $116.1 billion we received in support. As a reminder, our dividend payments to Treasury do not offset prior draws.

Now let me step back a bit and offer a few observations on our results, our progress over the past several years and our path forward. First, we have in place strong underwriting eligibility and risk management standards to protect taxpayers.

These are the standards that we have been using since 2009. The vast majority of the single-family mortgages that Fannie Mae finances are the popular 15- and 30-year fixed rate loans that give homeowners the ability to refinance at any time.

The serious delinquency rate on our loans has decreased for 22 consecutive quarters going back to 2010, and Fannie Mae has helped more than 1.8 million families avoid foreclosure since 2009 through workout solutions and loan modifications.

Second, we're putting lenders and other partners that we serve at the center of everything that we do. We're simplifying our processes and providing customers with innovative technology that makes doing business with us easier and more transparent.

We are helping lenders gain a more complete and a more accurate view of a homeowner's financial situation and the type of loan that will be affordable and sustainable over the long haul. In short, we're providing lenders with the tools they need to bring home lending into the 21st century.

For example, more than a year ago, we introduced Collateral Underwriter, and we're getting great feedback on it. Our lenders are telling us that Collateral Underwriter gives them clarity on appraisals while actually speeding up their underwriting process.

More than 1,300 lenders have used Collateral Underwriter, free of charge, to gain greater certainty on more than 0.5 million appraisals to date. Collateral Underwriter is revolutionary and it moves us toward our goal of providing representation and warranty relief on appraisals.

We're also introducing other innovations such as the use of trended credit data, nontraditional credit profiles and borrower income validation. Our ultimate aim is to be able to verify information such as borrower income, borrower assets and property value in a highly automated manner.

These innovative tools will make things simpler and more certain for lenders and easier for borrowers. By enabling us to inspect a loan before it is funded, these tools also reduce repurchase risk and uncertainty in the housing market.

I'm pleased to say that we've made a lot of progress on reducing repurchases. We are limiting the number of repurchases we pursue because we have better tools available to us, and we're giving lenders an opportunity to correct issues or give us more information when we issue a request.

For example, out of the 1.9 million single-family loans delivered to us during 2014, we have issued repurchase requests on less than 7,700 loans. And of those requests, less than 1,900 loans were actually repurchased.

These actions are intended to encourage lenders to remove overlays and make full use of our credit box.

This brings me to my third observation. The changes we are making on the front end of the loan process are helping us provide more qualified borrowers with access to affordable, sustainable mortgage credit.

Since the start of 2009, Fannie Mae has provided more than $4.9 trillion in liquidity to enable 5.3 million home purchases, over 14 million refinancings and financing for over 3 million rental units.

To meet the growing demand for housing, we are introducing new products that expand opportunity and provide borrowers with more flexibility, especially in areas with low incomes and areas with high minority populations. For example, our new solution, HomeReady, provides borrowers with additional flexibility on the source of the down payment and underwriting as well as online borrower education.

Importantly, HomeReady is built using our rigorous credit standards. In addition, over time, it will use trended credit data instead of static credit data, giving lenders insight into each borrower's use of credit over time and providing a more complete picture of risk and eligibility.

We will also offer a validation system so that lenders can validate key credit elements directly, starting with borrower income by accessing source data, instead of relying on the borrower to provide pay stubs. This will increase efficiency and further minimize risk.

We are also taking steps to ensure that we are there to meet the growing demand for affordable rental options. We are making it easier for multifamily lenders to do business with us by standing up our new front-end loan approval system, DUS Gateway.

And we continue to lay off risk with multifamily financing transactions as a result of our risk sharing program with lenders.

Our goal is to serve the widest possible spectrum of the multifamily market, which brings me to my final point. We are building a stronger, more competitive business and a more reliable and sustainable business model that better protects taxpayers and draws more private capital into the country's housing finance system.

Historically, we kept most of the credit risk on single-family loans we acquired for the life of those loans. More and more, we are moving that risk to private investors.

In fact, by the end of this year, we will have transferred a portion of the credit risk on approximately $0.5 trillion of loans. This reduces the role of government, reduces risk for taxpayers and expands the role of private capital in America's mortgage market.

The sum of these changes signals the beginning of a new ecosystem for housing finance.

So in closing, housing has made real and substantial progress since the crisis, and Fannie Mae is proud to be the leader in moving the housing forward. We continue to focus our efforts on the work that still needs to get done today to meet the housing challenges of tomorrow.

I appreciate your time, and I'm happy to open this up for your questions at this time.

I was wondering if you could talk a little bit about the kinds of borrowers you're seeing this year. A report came out a few days ago basically showing that the number of purchased loans going to borrowers with a FICO score below 700 has actually dropped this year.

In addition to that, we're not really seeing much of a pickup in first-time buyer share, at least that I've seen. I guess, what do you think is keeping these borrowers -- first of all, are you guys seeing similar trends?

And what do you think is keeping these borrowers away? Is it a demand issue or are there still overlay issues?

Or what do you think is going on?

So thanks, Joe, for the question, appreciate it. Well, I think there are a number of things going on.

So I don't think there's any simple answer to the question. First, I think we have had an increase in refinancing activity, given where interest rates have gone this year, going down.

And as you know, when that happens, we get more refinancing acquisitions as opposed to purchase money acquisitions. And typically, the credit scores of people who are refinancing their loans tend to be higher than people who are purchase money buyers.

So that's part of it, I think. I do think also that there's clearly some evidence that some borrowers think that what they need to be able to qualify for a loan is more than what they really do need.

So we've done some research in this area, and we see that, especially among younger people and people in -- minority people that they have a tendency to believe that they need higher credit scores to qualify for a loan than is, in fact, the case. And as a result, they may choose just not to apply for those loans or to pursue buying a house.

So I think there's an education process that needs to go on in the marketplace to make people more aware of that. And then third, I think there are -- while I think many overlays have come off, I think there're still -- lenders are still cautious.

And I think what we'll see is kind of a gradual move in that area, and I doubt that we'll see anything particularly dramatic. But I think that our goal is to -- at the end of the day, is not to change our credit box.

We've been very consistent in terms of what we're prepared to acquire, but what we do see is that lenders are not delivering to us to the full range or extent of our credit box. And so some of the things that we've been doing, like coming out with our HomeReady product, which allows people to borrow up to 97% loan-to-value, is to make it clear to the marketplace that we are prepared to buy those loans, that, that credit is available and to encourage consumers to come forward with those applications.

So I think it's a complicated story, but we're trying to focus on all the different elements of it.

I wanted to see if it was possible for you to go over those repurchase numbers again and how those have been reduced?

Oh, sure. So these are numbers for all of 2014.

So these are all the loans that we acquired -- single-family loans we acquired during 2014. So that's 1.9 million single-family loans that were delivered during the course of the year.

Of those, we have issued repurchase requests on less than 7,700 loans. And then of those requests, as a result of either the lender correcting the problem or providing us with more information to solve -- resolve our issue, less than 1,900 of those loans were actually repurchased by the lender.

So we had 1.9 million single-family loans delivered to us in 2014, less than 1,900 of those were actually repurchased by lenders.

On the repurchase -- following up on the repurchase question. Can you give us some context, the 1,900 were actually repurchased in 2014, you have requested 7,700.

Like, can you go back a couple of years? Like, how much lower are those numbers?

Yes. I don't have those numbers in front of me.

But obviously, if you go back to the -- go back a few years where we were reviewing loans that had been delivered to us in the years leading up to the crisis, the volume of repurchase demand was much, much higher. So we can get you some of those detailed figures, but I just don't happen to have them there in front of me right now.

I think one other thing I'd just like to -- since we're talking about repurchases here, one other thing I'd just like to mention is that, as you know, we changed the representation and warranty framework to have kind of an automatic release of rep and warrant -- representations and warranties by lenders as loans matured. And so over time, the reps and warrants basically go away.

And so just to remind you, more than 1 million loans that we've acquired since January 2013 are now free and clear of repurchase liability for breaches of certain representations and warranties, and that number will only increase over time. So in the next few years, millions of additional loans delivered to us, we would expect to receive similar repurchase relief.

So I think the rate of requests for repurchase has gone way down. And in addition, the changes to the representation and warranty framework that give lenders rep and warrant relief, going forward, I think will have a dramatic impact on this issue.

Thank you. And thank you all for your attention this morning.

We appreciate your questions. We wish you a good day.

We'll talk to you in another quarter. Thanks a lot.