Fannie Mae

Good day and welcome to the Fannie Mae 3rd Quarter 2022 Financial Results Conference Call. At this time, I will now turn it over to your host, Pete Backell, Fannie Mae's Director of External Communications.

Hello, and thank you all for joining today's conference call to discuss Fannie Mae's 3rd Quarter 2022 Financial Results. Please note this call includes forward-looking statements, including statements about Fannie Mae's expectations related to economic and housing market conditions, their impact on our business and financial results, and the factors that will affect them, the future performance of the company's book of business, the company's business plans and their impact, and the company's financial results and the factors that will affect them. Future events may turn out to be very different from these statements. The risk factors and forward-looking statement sections in the company's third quarter 2022 Form 10-Q filed today and its 2021 Form 10-K filed February 15, 2022, describe factors that may lead to different results. A recording of this call 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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 President and Interim Chief Executive Officer, David C. Benson, and Fannie Mae Chief Financial Officer, Krista C. Halley.

Thanks, Pete, and thanks to all of you for joining us as we review our third quarter financial results. We reported $2.4 billion in net income compared to $4.7 billion in the previous quarter. These earnings resulted in an increase in our net worth to $58.8 billion. Now, in a moment, Carissa will do a deeper dive into our quarterly results and their main drivers, including the macroeconomic conditions impacting housing. In the third quarter, inflationary pressures persisted. September data showed the consumer price index grew 8.2% year over year. The Federal Reserve continued to increase short-term interest rates in its attempt to tame inflation and reiterated a commitment to reducing its balance sheet. The 10-year Treasury rate increased 82 basis points over the course of the quarter from 3.01% to 3.83%. And while third quarter GDP increased by 2.6% on an annualized basis, We believe this boost is likely temporary and that full year 2022 GDP will be essentially flat. All of these factors are having a direct impact on the housing finance system and on our business. The 30-year fixed rate mortgage rate increased 100 basis points during the quarter from 5.7% to 6.7%, and at October month end was at 7.08%. Following a period of rapid home price growth in 2020, 2021, and the first half of 2022, home prices declined to 0.2% on a national basis in the third quarter. We estimate that home prices nationally rose 13.8% year over year in the third quarter, a deceleration from the revised 19.1% year over year growth we saw in the second quarter. Now for borrowers, These price increases and rising interest rates mean that homes are significantly less affordable than they were a year ago. By our measure, affordability is worse than it was during the 2005-2007 period. As houses become less affordable, demand for housing slows. There were around 5.4 million new and existing home sales in the third quarter, a 10% decrease from the prior quarter and a 21% decrease from the third quarter of last year. Renters also continue to face affordability challenges. We now expect annual rent growth across all classes to be in the 5% to 6% range in 2022, much of which has already taken place through the third quarter. Mortgage lenders are seeing a dramatic reduction in origination volume. We estimate $514 billion in single-family mortgage originations in the third quarter, a 24% decrease from the prior quarter, and a 54% decrease from the third quarter of last year. Given rising interest rates, home loan application volume has dropped dramatically, and the mix of business has changed with significantly fewer refinances than in previous quarters. As a result, the market is seeing notable impacts on lender business models and activities. Consistent with this lower level of activity, Fannie Mae has seen less business volume. Our single family acquisitions fell by 32% compared to the previous quarter and by 60% compared to the third quarter of 2021. 79% of our acquisition volumes in the third quarter were purchase mortgages, the highest share we have seen for at least two decades. In multifamily, our acquisitions declined to $15.9 billion, down from $18.7 billion the prior quarter. Despite these headwinds, Fannie Mae provided $134 billion in financing in the third quarter to single-family and multifamily markets, which supported 527,000 units of housing. More than 45% of our single-family home purchase acquisitions in the third quarter of 2022 were to first-time homebuyers. And over 95% of the multifamily units we financed in the third quarter of 2022 that were potentially eligible for Housing Goals credit were affordable to those earning at or below 120% of the median income in their area, providing support for both workforce housing and affordable housing. As these numbers demonstrate, we are intently focused on our role as a liquidity provider through all market conditions, including today's. In order to fulfill that role responsibly for the renters and borrowers we serve and for the broader housing finance system, we need to successfully manage risk on both our acquisitions and our $4 trillion book of business. We have in place strong underwriting and loan quality standards and improved technology, which makes us and the housing finance system better prepared for a potential downturn. Let me call out a couple examples. about our single family guarantee book of business to support this. Fixed rate loans comprised 99% of our book at the end of the third quarter. This means that these borrowers will not be subject to payment shocks on their mortgages in a rising interest rate environment. And looking at the credit quality of our book as of the end of the third quarter, you'll see a weighted average mark to market loan to value ratio of 50% and a weighted average credit score at origination of 752. Beyond the credit quality of our book, we also have effective, proven tools to support homeowners who experience financial hardship. They also help to manage Fannie Mae's book against defaults. By effectively managing risk and strengthening the company, we're also strengthening our ability to deliver on our mission. We strongly believe that safety and soundness and mission reinforce each other, In this economic environment, the industry is looking to Fannie Mae to be a stable pillar for the market and also for our leadership on housing affordability and equity. Recently, FHFA announced some changes aimed at enhancing affordability and transparency while also maintaining safety and soundness. These include revisions to our pricing framework and an update to the credit score model we and others in the industry use as part of the mortgage process. We will be working with FHFA and the industry to implement these enhancements. So as we move through this period of economic uncertainty, we're doing so from a position of relative strength, but we also know we can't be complacent. While we currently expect GDP growth to be essentially flat for 2022, we continue to believe that a modest recession is likely to occur beginning in the first quarter of next year. We expect mortgage rates to stay elevated through the end of this year and in 2023. We expect additional home price declines in the fourth quarter of 2022. More specifically, we expect national home price declines of 1.9% in the second half of this year and home price declines of 1.5% next year. This is a shift from our expectations last quarter when we forecasted home price growth in these periods. We project that elevated mortgage rates and a slowing economy will continue to challenge affordability and constrain home sales and single-family housing starts through the remainder of this year and into next year. We expect single-family, multi-family housing starts to further decline compared with 2022 due to the economic constraints already discussed. So now I'll turn it over to Carissa to address our third quarter results in more detail.