Fannie Mae

Good day and welcome to the Fannie Mae Third 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 Third Quarter 2025 Financial Results. Please note, this webcast includes forward-looking statements, including expectations related to housing market and economic conditions and their impact, the future performance and credit characteristics 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 statement section in the company's third quarter 2025 Form 10Q filed today, and in the company's 2024 Form 10K filed on February 14th, 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 We ask that you do not record this webcast for public broadcast and that you do not publish any full transcript.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 Chief Financial Officer, Krista C. Howey.

Good morning. Thank you for joining Fannie Mae's third quarter earnings call. As many of you know, last week, Peter Acquaboe was named Acting Chief Executive Officer of Fannie Mae upon the departure of Priscilla Almodovar. On behalf of Fannie Mae's executive leadership team and all Fannie Mae employees, I want to thank Priscilla for her service as CEO, and I look forward to working closely with Peter during this transition. We remain focused on building capital through strong earnings, disciplined risk management, and operational efficiency to deliver meaningful results for homeowners and renters across America. We look forward to delivering on that commitment as we close out 2025. Now, turning to our third quarter results. During this call, I'll refer to the earnings presentation to explain the drivers of our performance. We reported $3.9 billion of net income, which is up 16% versus the second quarter and down 5% year on year, mainly due to changes in provision for credit loss. Our guarantee book was $4.1 trillion and continued to drive stable guarantee fee revenues. As a result, net revenues were $7.3 billion, relatively flat compared to the second quarter and year on year. This performance contributed to growing our net worth to $105.5 billion. Finally, To help assess our financial performance and capital efficiency, we calculate an illustrative return on required equity measure based on annualized year-to-date net income divided by our average common equity tier one capital requirement. The third quarter illustrative return increased to 10.3%. In the third quarter, we also continued to make a positive impact for households across America. For example, despite continued affordability headwinds and buyer caution in the housing market, we provided $109 billion of liquidity to the mortgage market. This helped over 400,000 households, including 207,000 homebuyers, about half of whom were first-time homebuyers. We also help to keep over 23,000 households in their homes by offering various forms of assistance. Year to date, we have provided $287 billion of liquidity to the mortgage market and have helped 1.1 million households buy, refinance, or rent a home in the US. Continuing on page two, Reductions in the provision for credit losses and non-interest expense were the main factors driving net income higher in the third quarter. These positive quarter-over-quarter gains were partially offset by lower fair value gains. The growth in our net worth is supported by our stable guarantee fees, which accounted for almost 81% of third quarter net revenues, reinforcing the strength and consistency of our business model. On page three, we highlight the drivers and components of our net interest income. Our guaranteed business drives the majority of our net interest income, and the size of our guarantee book is impacted by home prices, mortgage rates, and our market share over time. Through the third quarter, we see base guarantee fees trending up slightly as the single-family book slowly turns over at higher guarantee fees and the multifamily book grows. Affordability continues to impact single-family buyers and new acquisitions have not fully offset book runoff. 80% of single-family acquisitions in the third quarter were purchase loans instead of refinance loans, keeping deferred guarantee fees lower relative to 2021 and 2022. Although mortgage rates declined late in the third quarter, it typically takes two to three months to observe related changes in acquisition volumes. Based on rates of the current loans in our single family book, we do not expect a meaningful pickup in refinancing unless rates drop below 5%. Turning to our net interest margin on page four, Our NIM remains stable at 66 basis points for the first nine months of the year and is similar to pre-pandemic years without large refinance volumes. As we mentioned last quarter, the largest contributing factor to NIM is the guarantee fees we earn. These fees come through our income statement as interest income rather than fee income because we consolidate the MBS trust on our balance sheet. Average multifamily guarantee fees have declined from 2022, driven by lower-priced new business relative to portfolio runoff. Multifamily pricing is primarily based on individual loan characteristics, but is also influenced by external forces such as interest rates, MBS spreads, the availability and cost of other sources of liquidity, and our mission-related goals. we continue to provide liquidity to the market while remaining competitive. The average total book guarantee fee continues to reflect the average single family guarantee fee trend as our single family book is over six times the size of the multifamily book. On page five, we show relatively stable credit performance of the total guarantee book despite multifamily challenges. In the third quarter, the percentage of seriously delinquent and non-performing multifamily loans increased by seven basis points from the prior quarter, and net charge-offs increased four basis points from the prior quarter. Accumulated pressure on properties following sustained market challenges combined with recent softness in rent and net operating income growth has led to a rise in delinquent loans and net charge-offs in recent years. The multifamily provision for credit losses in the third quarter was primarily driven by an increase in delinquencies. Meanwhile, single-family seriously delinquent loans, non-performing loans, and charge-offs increased modestly from the second quarter. We continue to monitor various financial pressures on U.S. households. The single family provision for credit losses in the third quarter was mostly driven by provision associated with loans that we acquired during the period. Overall, we built our allowance this quarter by $6 million, and with $332 million of net charge-offs, we had $338 million of provision expense. On page six, cost management remains a top priority. Total non-interest expenses were down 8% compared to the prior quarter and 10% year-on-year driven by other income and reductions in administrative expenses. The shift to other income in the third quarter from other expenses in prior periods was mostly attributable to two elements. First, our purchases of single-family Fannie Mae MBS in the third quarter of 2025 resulted in debt extinguishment gains. Second, we had lower foreclosed property expense, where we have changed our strategy for repairing foreclosed properties. The decrease in administrative expenses was mainly a result of lower salaries and benefits and professional services from a reduction in our employee and contractor workforce. On page seven, We continue to build capital by retaining our net income, and since January 2020, we have increased our net worth by $92 billion, including $45.2 billion since we began reporting our capital position under the enterprise regulatory capital framework for the fourth quarter of 2022. At the end of the third quarter, our regulatory capital position reflected a total capital deficit of $25.4 billion. This deficit exists despite a net worth of $105.5 billion because the senior preferred stock and our deferred tax assets do not count as regulatory capital. In addition to the $25 billion deficit, we would need $190 billion of eligible capital to fulfill our total capital requirements as of the third quarter. We have continued to build towards our total capital requirement through retained earnings. Additionally, in August, we released our 2025 Dodd-Frank stress test results, and they showed that even in a scenario more severe than the Great Recession, We continue to support the housing market during times of stress. Now, turning to the results of our two business lines. On page eight, our single family business, which today represents 87% of the guarantee book and 83% of our net revenues, had another quarter of consistent, strong results. Net income increased 13% from the second quarter, primarily due to a $468 million decrease in provision for credit losses and a $131 million decrease in non-interest expense, which were partially offset by a shift to fair value losses from fair value gains in the prior quarter. Third quarter loan acquisitions increased from the second quarter to $90 billion, following seasonal patterns similar to the third quarter of 2024 and included a higher share of purchase acquisitions. As noted, the single family guarantee book has declined slightly from the second quarter as new acquisitions have not offset existing book runoff. On page nine, 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. As we mentioned last quarter, we are seeing acquisitions trend slightly higher on FICO scores, less than 680, and debt to income greater than 43%, and we are monitoring those items. The increasing trend in acquisitions with DTI greater than 43% is primarily due to a higher mix of purchase volumes, purchasers tend to enter at or near their monthly mortgage payment affordability level, so we would expect the trend to persist until rates decline and refinance activity picks up. As of the third quarter, 47% of the single-family book, or $1.7 trillion, was covered by one or more forms of credit enhancement, including $758 billion in primary mortgage insurance. On page 10, for multifamily, net income increased 33% from the second quarter, mainly due to a decrease in provision for credit losses. Higher net revenues and lower non-interest expenses also contributed to higher net income. Third quarter new business volumes were $18.7 billion, up $1.3 billion from the second quarter. The multifamily guarantee book increased $10 billion from the second quarter to the third quarter. On page 11, we highlight the credit characteristics of the multifamily book. Debt service coverage and original loan to value metrics for both the guarantee book and new acquisitions remain in line with levels prior to 2022. Because of our unique DUS risk sharing model and our CRT programs, nearly all of the multifamily guarantee book had some form of credit protection at the end of the third quarter. Finally, on page 12, I want to touch on our liquidity, debt, and retained mortgage portfolios. Our debt portfolio decreased in the first nine months of 2025 as our funding needs were primarily satisfied by earnings retained from our operations. In the retained mortgage portfolio, the lender liquidity portfolio has increased in each of the last two quarters as assets from the liquidity portfolio were invested in MBS to support market liquidity, which has increased the earnings on these holdings. The quarter-over-quarter increase in our loss mitigation portfolio reflects lower non-performing and re-performing loan sales volumes. To wrap up, this quarter's results highlighted two themes. We delivered $3.9 billion in net income for the quarter and $10.8 billion year-to-date, underscoring the strength and resilience of our earnings. The second, our Guarantee business continues to serve as a consistent and durable foundation for our revenue base. We remain committed to building regulatory capital and supporting the housing market while operating in a safe and sound manner.

Thank you, everyone. That concludes today's webcast.