Fannie Mae

Good day and welcome to the Fannie Mae Second Quarter 2025 Financial Results Webcast. At this time, I will now turn it over to your host, Terrence O'Hara, Fannie Mae's Director of Enterprise Communications.

Hello, and thank you for joining today's webcast to discuss Fannie Mae's Second Quarter 2025 Financial Results. Please note this webcast includes forward-looking statements, including expectations related to housing market conditions, the future performance of the company's book of business, the company's future financial performance, and the company's future plans and their impact. Future events may turn out to be very different from these statements. The forward-looking statements section of the company's second quarter 2025 Form 10Q filed today and in the company's 2024 Form 10K filed on February 14, 2025, identify factors that may lead to different results. A recording of this webcast may be posted on the company's website. We ask that you do not record this webcast for public broadcast and that you do not publish any full transcript. I'd like now to turn the call over to Fannie Mae's President and Chief Executive Officer, Priscilla Almodovar, and Fannie Mae Chief Financial Officer, Krissa C. Halley.

Good morning. Thank you for joining us for Fannie Mae's second quarter earnings call. Today, we're excited to share some changes to our quarterly earnings materials, which we made to help enhance the understanding of our results. You'll notice that we've rebranded what we previously called our financial supplement into an earnings presentation. During this call, we'll refer to the earnings presentation to share our results and explain the drivers of our performance. And with that, let me start with key highlights for the second quarter on page one. We reported $3.3 billion of net income, which is down 9% versus first quarter and down 26% year-on-year, predominantly due to a higher provision for credit losses. Net revenues were $7.2 billion, up 2% versus first quarter, and relatively flat year-on-year. Meanwhile, our focus on efficiency remains a top priority, and during the quarter, non-interest expenses were down over $250 million, versus the prior quarter. Reflecting the progress on expenses, our efficiency ratio this quarter was 31.5%. This progress on expenses was greatly aided by the efficiency and deregulation efforts of Director Pulte and the entire team at U.S. Federal Housing. Our guarantee book, which held relatively flat at 4.1 trillion, drove our second quarter guarantee fee revenues, and we built 3.7 billion of regulatory capital. We calculate illustrative return on required common equity Tier 1 as a way to measure and compare our performance to peers. And in the second quarter, our return on equity was 9.5%. Now, turning to our impact, at Fannie Mae, our mission is the heart of what we do. In the second quarter, we proudly continued to make a material positive impact for American households. Despite a sluggish spring homebuying season, we provided $102 billion of liquidity to the mortgage market. This helped 381,000 households, including 183,000 homebuyers, 52% of whom were first-time homebuyers. We also helped to keep over 25,000 households in their homes by offering various forms of assistance. Year to date, we have provided $178 billion of liquidity to the mortgage market and have helped 668,000 households buy, refinance, or rent a home in the U.S. Additionally, this quarter, we had a few notable achievements at Fannie Mae. We announced a fraud detection and prevention partnership with Palantir Technologies. We surpassed $100 billion of total equity, which we refer to as net worth. ending the quarter at 101.6 billion. And we ranked 25 in the 2025 Fortune 500. In summary, the second quarter delivered on our expense focus while also highlighting our steady revenues and commitments to building capital and achieving attractive returns. We are steadfast in our mission and in safely and soundly making a positive impact on American housing. In partnership with Director Pulte and U.S. Federal Housing, our Fannie Mae team is deeply engaged and energized to continue to find ways to make housing more affordable, drive efficiencies, and prevent fraud. Now I'll turn the call over to Priscilla Haley, our Chief Financial Officer, to walk through the financial results in more detail.

Thank you, Priscilla, and good morning, everyone. Picking up on page two, as Priscilla mentioned in the second quarter, We earned $3.3 billion of net income, had generally stable revenues versus comparable quarters, lower non-interest expenses, and higher provision for credit losses. I'll address credit and the provision in more detail in a moment, but the increase in provision is the main factor driving that income lower in the second quarter versus comparable quarters. Our total assets have stayed relatively flat compared with the first quarter and year-over-year, as dynamics in the housing market continue the trend of fairly muted refinancing activity and new acquisitions coming in a bit short of portfolio runoff. Wrapping up this page, our net worth has grown 18% in the last year, and in second quarter we had a return on assets of 31 basis points and a return on risk-weighted assets of 1%. On page three, we highlight the drivers and components of net interest income. Our guaranteed business drives the majority of our net interest income, and our guaranteed book balance is impacted by home prices, mortgage rates, and over time, our market share. So far in the first half of the year, you'll see the composition of net interest income is trending similarly to full year 2024. This again is due to trends in the housing market, namely mortgage rates, which remained elevated, and home price appreciation up 2% in the quarter, keeping purchase and refinance activity relatively low versus levels we saw in 2020 and 2021. Overall, our base guarantee fee income has remained fairly steady in the last three years because the guaranteed book UPV has remained around the same level. Deferred guarantee fees have tapered off since level seen in 2021, largely because of slowing prepayment rates, which slows down the recognition of the deferred fees. You'll also notice over the last few years that our liquidity and retained mortgage portfolios have contributed more to net interest income. Driving that increase is our significant progress building capital and the positive spread we've earned on our liquidity and retained mortgage portfolios relative to our cost of funding. Turning to page four, our net interest margin, or NIM, as you can see, is relatively stable over time. The largest contributing factor to our NIM is guarantee fees. The guarantee fees, which are a fee we earn for guaranteeing timely payment of principal and interest come through our income statement as interest income rather than fee income because we consolidate the MBS trust on our balance sheet. NIM for the second quarter and for the first half of the year was 66 basis points, similar to levels over the last few years. Fundamental to our business is strong credit risk management. On page five, we show credit metrics and trends for the total guarantee book and for the single family and multifamily businesses. In the second quarter, we saw a 10 basis point uptick and 30 days past due loans in the single family portfolio compared to the first quarter. This is partially attributable to the seasonal downtick we tend to see in the first quarter of the year as tax refunds and bonus payments support mortgage payments and then revert to slightly higher levels of delinquency in the second quarter. Seriously delinquent rates improved modestly for both the single-family and multi-family businesses this quarter versus last. On a total book basis, SDQ rates are nine basis points higher than the year-ago quarter. We are monitoring this trend and recognize the various financial pressures U.S. households nationwide face in this environment in addition to more localized impacts of natural disasters. Of note, In our single-family portfolio, the delinquency trend over the last five quarters is partially attributable to states impacted by hurricanes in the second half of 2024 experiencing higher delinquency rates, which peaked last quarter and are now tapering off. Net charge-offs for the total book and single-family remain muted and flat at two and one basis points, respectively. while multifamily charge-offs are up four and five basis points versus last quarter and the year-on-year quarter. Loans in the multifamily portfolio are bigger, and the multifamily portfolio total balance is smaller versus the single-family portfolio. So we see these upticks when just a small number of loans charge off. We built our allowance this quarter by $749 million. and with $197 million of net charge-offs, had $946 million of provision expense. Both our single-family and multifamily businesses contributed to the build-in allowance to 20 basis points this quarter from 18 basis points in the first quarter. In single-family, the main driver was lower actual and forecasted home price growth And in multifamily, the main driver was a deterioration in actual and forecasted property values. On single-family home prices, we are seeing some regional home price softness, including price declines in a small number of MSAs. Finally, on credit, and before we move to expenses, combating fraud in the mortgage industry continues to be a high priority for us and for Director Pulte. Avoiding fraud helps reduce credit losses, other expenses, and makes for a stronger mortgage market for everyone. Non-interest expenses on page 6 shows some of the recent progress we've made controlling costs. Total expenses were down 3% year-on-year and 10% compared to the prior quarter. The decrease in expenses is mostly attributable to reductions in employees and contractors as well as a decrease in credit enhancement expenses. This quarter, occupancy expenses were higher, particularly on a year-on-year basis due to accounting impacts from changes to our headquarter location lease. Our administrative expenses, which consist of salaries and benefits, professional services, occupancy and technology, were down 6% year-on-year and down 15% versus the first quarter. So we've made some good progress on the main expenses we can control, but we continue to look for opportunities to bring administrative costs down. Reflecting the improvement in costs, our efficiency ratio was 31.5% compared to 36.1% last quarter and 31.3% in the year-over-year quarter. Moving to page seven, we show a snapshot of our liquidity and debt portfolios. of note this quarter, the balances of the liquidity portfolio and debt portfolio declined, largely due to maturities of long-term debt that we did not replenish with new issuances. Page 8 shows our continued strong progress building capital, specifically common equity, by retaining our net income. As we've mentioned, our second quarter net worth is $101.6 billion, which has increased $88 billion since January of 2020. On a regulatory capital basis, we have a total capital deficit of $29 billion as of second quarter, mainly because senior preferred stock does not count as regulatory capital. Our deficit continues to shrink as we generate net income, as well as take other capital optimization actions. To fulfill our regulatory capital requirements, including buffers, As of the second quarter, we need to hold $139 billion of common equity tier one capital, or CET1. On a normal course basis, the main contributor to building CET1 is net income. Similarly, our risk-weighted assets are predominantly impacted by changes in credit risk-weighted assets and less so changes in market risk or operational risk. We built CET1 by $45 billion since the fourth quarter of 2022, and while we have a long way to go, remain focused on responsibly building towards our regulatory capital requirements. Now turning to the results of our two business lines, on page nine, our single family business, which today represents 88% of the guarantee portfolio and 84% of our net revenues, had another quarter of consistent, strong results. The $737 million provision this quarter was a function of $629 million of allowance billed due to the factors previously mentioned and $108 million of net charge-offs. The single-family guarantee book is relatively flat compared to comparable quarters, while second quarter loan acquisitions of $84 billion improved from first quarter levels due to seasonal trends and a slight uptick in refinance activity. On page 10, the credit profile of the single-family business continues to be strong, with acquisition credit metrics trending consistently on both a weighted average OLTV and FICO score basis. In the second quarter, we saw acquisitions trend slightly higher on a debt-to-income greater than 43% and FICO score less than 680 basis, and we are monitoring those items. You'll notice on the page that the DTI greater than 43% chart shows that ratio increasing over the last four years. A factor contributing to that trend is as mortgage rates have increased, our mix of purchase volume in relation to refinancing volume has gone up, and purchasers tend to enter at or near their monthly mortgage payment affordability level. So we would anticipate this mid-30s percent level to persist until rates trend downwards. We continue to transfer a portion of the credit risk in the single-family business to credit risk transfer or CRT investors And as of second quarter, 38% of the outstanding book was in a CRT transaction. Our multifamily business results on page 11 show increasing new business volumes of $17.4 billion, a $5.6 billion increase from the first quarter. The $209 million provision was the result of $120 million of allowance billed due to the factors previously mentioned and $89 million of net charge-offs. Multifamily expenses this quarter of $278 million were generally flat compared to the last quarter and up $102 million compared to the year-over-year quarter, mainly as a result of smaller change in credit enhancement recoveries and higher foreclosed property expenses. Lastly, Page 12 illustrates the consistent credit quality of the multifamily book. Debt service coverage and original loan to value metrics from both the total outstanding portfolio and new acquisitions remain at levels similar to the credit profile for the last few years. As of the second quarter, we continue to have 99% of the multifamily book covered by some form of lender loss share. and 35% of the multifamily book is covered by a CRT transaction. To wrap up, this quarter demonstrated our durable revenue, expense discipline, and continued strong credit quality. We are closely monitoring conditions in the mortgage market and are operating the business, taking those factors into account. Picking up on the earnings material changes Priscilla mentioned, in addition to the new earnings presentation, we have a new data supplement pack, which we'll release quarterly. You can find the presentation, supplement, and the Fannie Mae fact sheet, which we initiated last quarter, all on the quarterly and annual results section of our investor relations page on the Fannie Mae website. We hope you find these materials helpful, and we thank you for joining us this morning.

Thank you, everyone. That concludes