Federal National Mortgage Association

Thank you. And thank you, everyone, for joining the media call and webcast to discuss Fannie Mae Second Quarter 2017 Financial Results.

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

The Risk Factors in Forward-Looking Statements sections in the company's second quarter 2017 Form 10-Q filed today and 2016 Form 10-K, filed February 17, 2017, describes factors that may lead to different results. As a reminder, this call is being webcast and recorded by Fannie Mae, and a 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We ask that you do not record this call for public broadcast and that you do not publish any full transcript thereof. I'd now like to turn the Media Conference Call over to Fannie Mae's President and Chief Executive Officer, Tim Mayopoulos.

Thanks, Maureen. Good morning, everyone.

Thanks for joining us. Let me start with an overview of our second quarter 2017 financial results and the drivers of those results.

We reported net income of $3.2 billion and comprehensive income of $3.1 billion, each compares with $2.8 billion above net income and comprehensive income in the first quarter of this year. The main drivers of the change in net income were an increased in credit related income as well as a shift to investment gains from investment losses.

These were partially offset by higher fair value losses on the derivatives that we use to manage risk from interest rate changes. Detailed information regarding the drivers about results can be found in our press release and quarterly report on Form 10-Q, which we filed today.

Our second quarter results reflect another strong quarter in our Single-Family and Multifamily businesses. We've provided approximately $135 billion in liquidity to the mortgage market in the second quarter through our guarantees and loan purchases.

This supported approximately 316,000 home purchases, 222,000 home refinances and financing for approximately 162,000 multifamily housing units. We remained the largest provider of mortgage market liquidity in the quarter as well as the largest issuer of mortgage related securities.

Our Multifamily business volume in the first half of the year was a robust $30.6 billion. And we continue to lead the market in Multifamily Green Financing with $10.8 billion in production through the first half of 2017.

We also continue to improve our serious delinquency rates in our Single-Family business, which is dropped for 29 straight quarters to 1.01% as of the end of June. We will pay treasury another $3.1 billion dividend in September if FHFA declares a dividend in this amount.

This would bring our total dividend payments to Treasury to $165.8 billion. For more information on our dividend payments, I encourage you to read the relevant disclosures in today's Form 10-Q.

We also expect to remain profitable on an annual basis for the foreseeable future. However, as we have discussed in the past, fluctuations and factors beyond our control, such as interest rates and home prices, make our quarterly results potentially volatile.

These factors, combined with our dwindling capital cushion, could require further drives from treasury in the event of a quarterly loss. In addition, as we describe in our filing, a significant reduction in the corporate tax rate would require us to records a substantial reduction in the value of our deferred tax assets.

We expect this will result in a significant net loss, and that would deficit for the quarter in which the reduction is enacted and could potentially result in a net loss for that year. Let me provide an update on our important work to serve our customers and the housing finances system.

First, for our practical purposes we have completed Fannie Mae's change to a company whose income is driven largely by our guaranty business instead of our investment portfolio. Our guaranty business accounted for more than 75% of our net interest income for the first half of 2017.

This shift represents a significant change in our business model one that makes the company stronger. Second, the maturation of our credit restraints per capabilities represents another positive shift for our business.

In our credit rate transfer transactions, we transfer a portion of the mortgage credit risk on our loans in effect paying-for-credit risk protection where appropriate. The unpaid principal balance of loans covered by a credit risk transfer deal measure at --as of the time of the deal has now passed the $1 trillion mark.

This quarter GlobalCapital, an international financial trade publication recognized our expertise in this area with the Best Overall Issuer Award based on a vote by our peers and investors. We have also announced plans for an innovative new kind of securities that more types of investors can participate, such as Real Estate Investment Trust and foreign investors.

The expansion of our credit retransfer capabilities continues our change from being a company that buys and holds credit risk to one that also intelligently syndicates and distributes risk to private capital. With the growth of this new market, private capital plays a bigger role, taxpayers bear less risk and with a broader investor base, housing finance is more resilient.

Third, we're putting our customers at the center of everything we do, so that they can better serve their customers, the individuals and families looking to buy and rent homes. Our customer-centric approach means that we look at every move we make through the lens of our lenders, servicers, investors and taxpayers.

We are actively listening to our customers that we can better understand their paying points and address them. We are working with our customers every day on innovations that will allow them to provide a better, safer and more efficient experience.

I've spoken on previous calls about recent innovations such as our Day 1 Certainty initiative, our work at Multifamily Green Financing and our student debt initiatives. All that work is continuing to build momentum, but those are just examples of a broader focus on innovation that is permeating our company.

This sharper focus on innovation has us looking at new ways to encourage sustainable lending, for example. We are testing new innovations and evaluating how we can extend credit in proven ways in light of the economic environment.

Our focus on innovation is leading us to test how we can best serve changing housing markets such as the Single-Family rental market. We are also exploring new technology partnerships that hold the potential to improve the mortgage process and make the entire mortgage system better for borrowers, lenders and investors.

We are still early in this journey, in the coming months you can expect that Fannie Mae will be testing a number of new ideas with small private projects. We will carefully measure and monitor these pilots.

And we will use the results to improve ideas that are promising, scale those ideas that work and discontinue ones that do not. These pilots do not represent a change in Fannie Mae's risk appetite.

As we innovate, we will operate in a safe and sound way to protect taxpayers. But these pilots do represent a change in our willingness to think, act and partner in different ways, so that we can meet the challenges of today's and tomorrow's market.

And like the changes to our business model, they are a intangible expression of our fundamental commitment to provide liquidity in all markets and at all times. In summary, we had a strong quarter backed by strong business fundamentals in our guaranty business.

Our improved business model is making our company and housing finance more resilient and durable. We are committed to continuously deliver value to our customers.

And we will continue to innovate so that we can make our company and the system stronger and find new ways to safely and sustainably create housing opportunities that are affordable to more Americans. With that, I'm happy to open the lines up for your questions.

Okay. Well thank you, operator.

I appreciate everyone...

You -- during your call you said if FHFA declares a dividend, is that an indication? Is that semantics?

Are you expecting them to declare dividend as they have -- did in the past? Or are you expecting a change in policy?

Every quarter FHFA makes a determination as whether to declare dividend or not. And when they do declare dividend they direct us to pay it to the treasury department.

I'm not aware of any change in policy at FHFA. And [ actually ] Mel Watt will make his decision this quarter as he does in every quarter as to whether do they ask us to make that payment are not.

Obviously, if he directs us to make the payment, but that FHFA's decision to make.

I was wondering if you could talk a little bit about the decline in your serious delinquency rate. And basically, how much further do you think that might go?

And at one -- at what point, especially looking at your post-2008 book versus your pre-2008 book, will the rate declining rate sort of indicate that you guys I guess aren't taking on as much risk as you could and/or aren't getting delivered the loan or as many borrowers as you should be getting?

As I noted, our serious delinquency rate has declined for 29 straight quarters, I think that reflects, obviously, the fact that we're quite into new loans, some old loans are paying off, they're liquidating. There also reflects a very aggressive loss mitigation program that we had in place for a number of years to try to bring borrowers current and avoid foreclosures.

We would expect that our rate would continue to gradually and slowly continue to decline -- that as the Q rate will continue to go down. I don't know that it will actually go down at the same pace as what we've seen in the past.

I think it's moderating. But we would expect that to continue to go down.

If you go back and look at what delinquency rates were like in early the 2000s, and what people might consider to be a more normal housing environment, rates in the neighborhood of 60, 70 basis points were kind of what was normal then. So I would expect kind of a slower gradual glide path back to that, that general vicinity.

And that's what we'd expect to happen. But that might still take another year or 2 to get there.

Well, thank you, all for your attention, thanks for your questions. I hope you all have a great day.

We'll talk to you in another quarter, thanks.