Freddie Mac

Good morning, and thank you for joining us for a presentation of Freddie Mac's Third Quarter 2022 Financial Results. I'm Tom Schwartz, Deputy CEO and SVP of External Affairs and Corporate Communications. We're joined today by our CEO, Michael DeVito, and by our CFO, Chris Laun. Before we begin, we'd like to point out that during the call, Mr. DeVito and Mr. Laun 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 materially vary from its expectations. A description of those factors can be found in the company's quarterly report on form 10Q filed today. You'll find the 10Q earnings press release and related materials posted on the investor relations section of FreddieMac.com. This call is recorded and a replay will soon be available on FreddieMac.com. We ask that the call not be rebroadcast or transcribed. With that, I'll turn the call over to Freddie Mac's CEO, Michael DeVito.

Good morning, and thank you for joining our third quarter call to review financial results. Today, I'd like to cover three topics, the dynamic economic environment and what we're seeing, the positive impact of our efforts to provide liquidity, promote stability, and advance affordability in the market, and within the context of the strategic priorities I've discussed on past calls, how our focus on risk management, positions us to serve our mission in current and future economic environments. As I noted, the current environment is rapidly changing, largely driven by inflation and the Federal Reserve's reaction to it. Mortgage rates have risen quickly, and Freddie Mac's latest primary mortgage market survey shows the average mortgage rate is more than double from just a year ago. Rising rates are slowing down house price appreciation year over year. In fact, most recently, month-to-month house price changes show modest declines in a number of markets. This change is reflected in our financial results, where the combination of price declines and higher rates drove an increase in our third quarter provision for loan losses. Our CFO, Chris Lown, will address that later. Higher rates also contributed to softening single-family loan demand, which is now below pre-pandemic levels. This is true for purchase and refinance loans, and we saw this reflected in our loan purchase volumes for the quarter. The inventory of homes for sale is trending up modestly, but the housing market continues to remain undersupplied, despite a large pipeline of homes under construction. Additionally, the current slowdown in residential construction that we're seeing will prolong affordability challenges for some time. Renters are also experiencing price pressures. As we have previously reported, a recent Freddie Mac survey found that nearly 60% of renters reported that their rents increased over the past year, with a ratio of nearly one in three seeing rent increases of 10% or more. Taken together, rising rates, inflationary pressures, and continued supply issues have made accessing and sustaining home ownership harder and more expensive for more families. Given this context, it's very important that Freddie Mac continues to support a liquid stable, and affordable housing finance system. In the third quarter, our work resulted in more than $135 billion of liquidity to the market via our purchase of loans from nearly 1,000 sellers. Help for 542,000 families who bought, refinanced, or rented a home. Support for 130,000 first-time homebuyers who made up nearly half of all primary residence mortgages purchased by Freddie Mac. continued affordability in the multi-family market with 96% of all rental units we financed affordable to low and moderate income families, earning at or below 120% of area median income. And in doing so, net income of $1.3 billion, which increased our net worth to $35.2 billion. We also continued our work to help address the national housing shortage and affordability crisis, especially for underserved populations and neighborhoods. Over the course of the year, these efforts have included ramping up financing that supports newly constructed or substantially rehabilitated multifamily housing through an increased use of forward commitments, enhancing access to credit and homeownership opportunities for borrowers who demonstrate positive monthly cash flow through automated analysis of bank account data as part of our loan purchase decisions, responding to supply issues With a training program we call Develop the Developer to help increase the number of developers, including minority-owned businesses, in underserved areas. We've trained more than 70 single and multifamily developers to date. Expanding the type of loans Freddie Mac will purchase from housing finance agencies to include manufactured homes and two- to four-unit properties. And working to help small community lenders access Freddie Mac financing through a targeted correspondent multifamily lending program. These lenders are often focused on affordable lending. In prior calls, I've outlined a set of three priorities that support our mission. The pillars, managing risk, delivering results, and developing talent are all important. Today, I want to focus specifically on risk management. In fact, strong risk management is essential to ensure the stability of the housing finance system and Freddie Mac. This is especially the case in these dynamic economic times. To that end, I note that our risk metrics and current portfolio characteristics are very solid. Single-family delinquencies are as low as they've been since the start of the pandemic, and multifamily delinquencies remain low compared with other market participants. Credit scores continue to be strong, with average overall initial scores remaining above 740. While we remain undercapitalized from a regulatory standpoint, Our earnings enable us to continue adding to our net worth, which helps improve our capital resilience. The most recent Dodd-Frank Act stress test confirmed that Freddie Mac has sufficient retained earnings today to weather a hypothetical, severely adverse economic scenario. Our credit risk transfer program also contributes to this resilience. Since its inception, we have transferred risk on more than $3.2 trillion of mortgages private investors through the program. We see investors' continued willingness to invest in U.S. housing through Freddie Mac CRT, and we continue to demonstrate focus on effectively managing default risk. During the pandemic, we helped close to a million families avoid the risk of foreclosure through forbearance, deferrals, and loan modification tools. In various forms, these tools remain in place and ready to be deployed in the case of natural disasters, or ongoing economic concerns. In fact, they're being deployed right now in the wake of hurricanes striking Puerto Rico, Florida, and the Carolinas. But I want to be clear. The assistance we provide after these storms and the money we put aside to manage the financial fallout are not distractions from our mission. They're part of our mission to help homeowners, renters, and multifamily borrowers achieve and sustain the American dream. Now I'll turn the call over to Chris for a deeper look at our financial results.

Thank you, Michael. This morning we reported net income of $1.3 billion, a decrease of $1.6 billion, or 55% year over year. This decrease was primarily driven by a net reserve build of $1.9 billion this quarter, caused by deterioration in observed and forecast house prices in the quarter. Third quarter net revenues were $5.2 billion, down 1% year over year. This decline was largely driven by a $202 million decline in non-interest income due to lower guarantee income and a decrease in net investment gains in our multifamily business. This was partially offset by a $136 million increase in net interest income, driven in part by continued mortgage portfolio growth and higher average portfolio guarantee fee rates. Turning to our individual business segments, single family reported net income of $843 million, a decrease of $1.2 billion from the prior year quarter. This decrease resulted from a provision for credit losses of $1.8 billion, primarily driven by deterioration in housing market conditions, including lower observed and forecast house price appreciation in the third quarter. This was compared to a benefit of $244 million in the prior year quarter, that was primarily driven by reduced expected credit losses related to COVID-19 and observed house price appreciation. Our net allowance for loan losses for single family increased 35% to $7.2 billion this quarter from $5.3 billion in the prior quarter. Our single family allowance for credit losses coverage ratio increased to 23 basis points, up from 17 basis points in the prior quarter. The increase in our allowance for loan losses was primarily driven by our third quarter house price appreciation forecast, which now forecasts a 6.7% increase in 2022 and a 0.2% decline in 2023. This forecast is significantly lower than our prior quarter forecast, which forecast an increase of 12.8% for 2022 and a 4% increase in 2023. Single family net revenues of $4.4 billion increased $460 million, or 12%, from the prior year quarter, driven by higher net interest income, primarily due to continued mortgage portfolio growth, and higher average portfolio guarantee fee rates. This was partially offset by lower deferred fee income, driven by slower prepayments due to higher mortgage interest rates. New business activity of $121 billion declined $178 billion year-over-year as we continue to see a meaningful decline in refinance activity due to rising mortgage interest rates. Refinance volume declined $144 billion, or 86% year-over-year. Purchase volume of $98 billion this quarter accounted for 80% of our total single-family new business activity. Our single-family mortgage portfolio grew 11% year-over-year to $3.0 trillion at the end of the third quarter due to an increase in average portfolio loan size and a higher share of the overall market. Single-family portfolio credit characteristics remained strong, with the weighted average current loan-to-value ratio at 53% and the weighted average current credit score at 756. The serious delinquency rate declined to 67 basis points from 76 basis points in the second quarter of 2022. Single-family loan workout activity decreased to 28,000 units this quarter from 73,000 in the third quarter of 2021 as the overall forbearance population continued to decline. At the end of the third quarter, 61% of our single-family mortgage portfolio was covered by some form of credit enhancement. The multifamily segment reported net income of $470 million, down $421 million from the prior year quarter. This decline was primarily driven by lower net investment gains due to lower margins on new loan purchases and securitizations, and lower guaranteed income due to fair value losses on guaranteed assets as a result of higher interest rates. Multifamily new business activity was $14 billion in the third quarter, and the multifamily mortgage portfolio increased by 3% year over year to $416 billion. The multifamily delinquency rate was 13 basis points at the end of the third quarter, up one basis point year over year. The increase in the multifamily delinquency rate was driven by certain senior housing loans underlying K deals with subordination. Our credit risk exposure to these delinquencies is substantially reduced by our credit enhancement coverage. Approximately 95% of the multifamily mortgage portfolio was covered by credit enhancements at the end of the third quarter. Our net worth increased to $35.2 billion at the end of the quarter, representing a 39% increase year over year. And with that, I'd like to turn it back to Michael.

Thank you, Chris. In a dynamic economic environment, Freddie Mac continued to provide much-needed liquidity, stability, and affordability to the housing finance system. We earned quarterly net income of $1.3 billion and added to the capital that supports our mission. With our focus on risk management, we're actively managing the company to support homebuyers, renters, and the housing market throughout the economic cycle.