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Earnings call: Fannie Mae reports strong 2023 net income, faces capital shortfall

EditorRachael Rajan
Published 02/16/2024, 12:41 PM
© Reuters.

Fannie Mae (FNMA (ST:FNMA)) has reported a substantial increase in net income for the year 2023, recording $17.4 billion, up from $12.9 billion in the previous year. Despite a challenging economic environment marked by high mortgage rates and multifamily sector pressures, the company has managed to provide significant liquidity to the housing market and support millions of households. However, it remains significantly undercapitalized, with a $243 billion shortfall, and faces uncertainties in the housing market for 2024.

Key Takeaways

  • Fannie Mae's net income rose to $17.4 billion in 2023, up from $12.9 billion in 2022.
  • The company provided $369 billion in liquidity, aiding 1.5 million households.
  • 30-year mortgage rates hit a 23-year high, leading to a decline in mortgage originations.
  • Home prices grew by 7.1%, while the multifamily sector saw declining property values and rent growth.
  • Fannie Mae transferred $308 billion in credit risk in single-family programs.
  • Economists forecast positive but below-trend growth and a potential Federal Reserve rate cut in 2024.
  • The company remains significantly undercapitalized with a $243 billion shortfall.

Company Outlook

  • Fannie Mae's economists anticipate positive but below-trend growth in 2024.
  • Single-family mortgage originations are expected to increase to nearly $2 trillion.
  • Multifamily housing starts are projected to decline due to elevated interest rates and supply.

Bearish Highlights

  • The multifamily sector is challenged by declining property values and slower rent growth.
  • There is a significant capital shortfall of $243 billion.
  • Multifamily serious delinquency rate increased to 46 basis points, primarily in seniors' housing loans.

Bullish Highlights

  • Net interest income reached $28.8 billion, with single-family net income at $14.9 billion.
  • Multifamily net income increased to $2.6 billion, up $400 million from 2022 due to decreased credit losses.
  • The company successfully transferred a portion of credit risk on nearly $31 billion of unpaid principal balance in multifamily loans.


  • Mortgage originations declined due to nearly 8% mortgage rates, the highest in 23 years.
  • Multifamily loan acquisitions dropped by 24% from the previous year.

Q&A Highlights

  • Fannie Mae is taking loss mitigation actions and foreclosures to address delinquencies.
  • The company completed two multifamily credit risk transfer transactions in 2023.
  • Approximately 2% of the company's multifamily book is expected to mature in 2024, with 3.5% in 2025.

Fannie Mae's financial performance in 2023 has been strong, yet it is tempered by the significant capital shortfall and the cautious outlook for the housing market in the coming year. The company's efforts to facilitate homeownership and rental opportunities, alongside its risk management strategies, demonstrate a commitment to navigating the complex economic landscape ahead. With the market anticipating a Federal Reserve interest rate cut, there may be shifts in mortgage rates that could impact the company's performance in 2024.

Full transcript - Ferronordic Machines (FNMA) Q4 2023:

Operator: Good day and welcome to the Fannie Mae Fourth Quarter and Full-Year 2023 Financial Results Conference Call. At this time, I will now turn it over to your host Pete Bakel, Fannie Mae's Director of External Communications.

Pete Bakel: Hello, and thank you all for joining today's conference call to discuss Fannie Mae's fourth quarter and full-year 2023 financial results. Please note this call includes forward-looking statements, including statements about Fannie Mae's expectations related to economic and housing market conditions, the future performance of the company's book of business, and the company's business plans and their impact. Future events may turn out to be very different from these statements. The risk factors and forward-looking statements sections in the company's 2023 Form 10-K filed today 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, Chief Executive Officer, Priscilla Almodovar; and Fannie Mae Chief Financial Officer Chryssa C. Halley.

Priscilla Almodovar: Welcome and thank you for joining us today. I'll begin by spending a few minutes on the economic environment, and then we'll turn to our financial admission performance for 2023. After that, our Chief Financial Officer, Chryssa Halley, will discuss our full-year and fourth quarter results in more detail. Let me begin with the economic environment. The economy held up much stronger in 2023 than we anticipated at the outset of the year. GDP grew at an annual rate of 3.1%; inflation came in at 3.2%, down from 7.1% in 2022, in part due to the 100 basis points increase in the Fed funds rate last year. This increase in rates had a direct effect on housing, our business, and the people we serve. 30-year mortgage rates reached a 23-year high of nearly 8% in October 2023, an average 6.8% over the full-year, that was up 1.5 percentage points from the prior year. The housing market is much different than it was just a few years ago. Back then, borrowers were able to access financing at historically low mortgage rates. Many of these borrowers sat tight in their homes, thanks to the low rates they locked in during 2020 and 2021. This lock in effect contributed to fewer homes available for sale. Despite this backdrop, home ownership is still in demand by many consumers and supply has not kept pace. One outcome of this is that home prices in 2023 were more resilient than expected. Single-family home prices increased by an estimated 7.1%. You will hear these higher home prices as a theme in our annual results. In addition, overall single-family mortgage originations remained low at $1.5 trillion, a 37% decline year-on-year. The multifamily sector also faced challenges. Property values declined, and the market saw significant new units in some areas, while in other areas supply continued to be constrained. At a national level, 2023 rent growth fell and we expect that it turned negative in the fourth quarter. Even so, affordability continues to remain a challenge for renters in many parts of the country. Overall, multifamily mortgage originations declined substantially year-on-year to an estimated range of $255 billion to $275 billion, compared to $480 billion in 2022. Turning to our financial results, we reported $17.4 billion in net income in 2023, compared to $12.9 billion of net income in 2022; $3.9 billion of this was attributable to the fourth quarter. The strength in home prices throughout the year had a direct impact on our earnings, largely due to the release of credit reserves that reflected higher actual and forecasted home prices. We continue to manage our capital shortfall through retained earnings and our credit risk transfer program. Our net worth increased to nearly $78 billion at the end of the year. This increased bolsters our financial stability and enables us to continue being a reliable source of mortgage credit for America's homeowners and renters. In 2023, working with our partners in housing finance, we provided $369 billion in liquidity, this helped 1.5 million households buy, refinance, or rent a home. This included approximately 189,000 low and very low income households. It also included 482,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of area median income. And we helped over 380,000 first-time home buyers to purchase a home. In all this work, we are guided by our mission. Let me share some examples of how we brought our mission to life in 2023, focusing on two key obstacles that many home buyers face, insufficient credit and upfront costs. First, regarding insufficient credit, we continued to use innovative ways to help the housing system see consumers with no or thin credit files. We are using on-time rent payments to help renters build and improve their credit scores. Through the end of last year, according to our vendors, we helped nearly 28,000 renters establish credit scores, and participating renters, who already had a credit score and saw an improvement had an average increase of 35 points. In our flagship automated underwriting system, Desktop Underwriter, we've made it possible for lenders to consider on-time rent payments and credit evaluations or to assess the cash flow and credit worthiness of borrowers, who don't have a credit score. As to lowering upfront cost of housing, we continue to modernize the home valuation process by using models and analytics that allow us to offer less costly appraisal waivers and alternatives. Through these options, low to moderate income borrowers saved an estimated $52 million in upfront costs in 2023. We're also giving lenders the option to use an attorney opinion letter instead of a traditional lender's title insurance policy on some transactions. And we increase the allowable loan to value ratios for 2 unit to 4 unit properties. This reduces upfront cost for these property types and preserves affordable rental housing. While we still have a lot of work to do to make the housing system work for everyone, we're very proud with the progress we have made so far. As I wrap up, 2023 marked Fannie Mae's 85th anniversary. As of September 30, we owned or guaranteed approximately one in four single-family mortgages and about one-fifth of multifamily mortgage debt outstanding in the United States. We take our responsibility seriously. Our mission guides us. The efforts we've taken to strengthen our business and our strong risk management focus are the foundation that allows us to deliver on our mission. As we move into 2024, we remain dedicated to expanding housing opportunities in ways that are responsible and sustainable. Already this year, we've announced a $2,500 credit to eligible home-ready borrowers, who made less than or equal to 50% of area median income, helping to address upfront costs for very low-income borrowers. We also announced enhanced single-family MBS disclosures, the Mission Index. This index provides insights into our mission activity, allowing MBS investors to allocate their capital in support of affordable housing and underserved borrowers and markets. Finally, before I turn it over to Chryssa, I want to thank our employees for making all that we did in 2023 possible. The work they do matters. The work matters to the people who live in the homes and apartments we help finance. It matters to communities throughout the nation, and it matters to our housing partners. Now, Chryssa will discuss our full-year and fourth quarter financial results.

Chryssa Halley: Thank you, Priscilla, and good morning. As Priscilla mentioned, we reported $17.4 billion in net income in 2023, compared to $12.9 billion in 2022. Net revenues remain strong with $28.8 billion in net interest income, thanks mainly to healthy guarantee fee income. This is slightly lower than 2022's net interest income. While our base guarantee fee income grew slightly in 2023, higher interest rates during the year drove a decline in deferred guarantee fee income due to lower refinance activity. This was offset by an increase in income due to higher yields on securities in our corporate liquidity portfolio, also driven by the higher interest rate environment. We recognized a $1.7 billion benefit for credit losses in 2023, primarily due to stronger-than-expected actual and forecasted home prices. Conversely, in 2022, we recorded an over $6 billion provision for credit losses. For the fourth quarter of 2023, net income was $3.9 billion, driven by strong net interest income from guarantee fees and our corporate liquidity portfolio. Now, let me turn to our segments. Starting with single-family, we reported $14.9 billion in net income in 2023, an increase of $4.1 billion, compared to 2022. This increase was driven by the release of credit reserves in 2023, while those reserves increased substantially in the prior year. Our reserve release was mainly due to an improvement in actual and forecasted home prices. We acquired $316 billion of single-family loans last year, a nearly 50% decrease, compared to 2022 and our lowest volume since 2000. Higher mortgage rates in 2023 drove refinance volumes to their lowest levels since before 2000. In fact, our percentage of acquisitions that were purchased mortgages last year grew to 86%. Our overall single-family book of business remains strong as of year-end, with a weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 753. Nearly 85% of our single-family book as of year-end had interest rates below 5%. Even if interest rates decline meaningfully, most of the borrowers whose loans are in our single-family book still would not be incentivized to refinance. Fixed-rate mortgage loans made up 99% of our single-family book as of the end of last year. Fixed-rate loans protect mortgage borrowers against interest rate shocks on their mortgage payments. Our single-family serious delinquency rate remained near historically low levels at 55 basis points as of December 31, compared to 65 basis points as of the end of 2022. In addition to market factors, this is a testament to the enhanced underwriting policies, loan workout options, and support we give to lenders and borrowers. Turning to our credit risk transfer program, in 2023, we executed 17 single-family credit risk transfer transactions between our Connecticut Avenue Securities and Credit Insurance Risk Transfer programs, transferring a portion of the credit risk on approximately $308 billion of unpaid principal balance at the time of the transactions. We paid $1.4 billion in annual premiums in 2023 on our outstanding single-family credit risk transfer transactions. Now in multi-family, we reported $2.6 billion in net income in 2023, an increase of $400 million, compared to 2022. This was primarily due to a decrease in the provision for credit losses year-over-year. In 2022, we recorded a $1.2 billion provision for multi-family credit losses, mostly driven by our seniors housing loans. In 2023, we recorded a $495 million provision for multi-family credit losses, due primarily to changes in loan activity and declining property values on our overall multifamily book. Our seniors housing loans did not drive our multi-family provision for credit losses in 2023, because of loss mitigation activities we performed last year and some recovery and property financials. However, our allowance for seniors' housing loans remained elevated. Turning to our acquisitions, we acquired $53 billion in multi-family loans last year, down 24% from 2022. Continued market uncertainty and high interest rates kept total market volumes low. Based on our analysis, we met the mission requirements set forth by FHFA for last year that required that at least 50% of our 2023 multi-family business volume focus on certain affordable and underserved market segments. The multi-family loans we acquired in 2023 had a weighted average original loan-to-value ratio of 59%. These loans also had a weighted average debt service coverage ratio of 1.6 times. The overall credit profile of our multi-family book remains strong, with a weighted average original loan-to-value ratio of 63% and a weighted average debt service coverage ratio of 2 times. We continue to monitor the impacts of elevated interest rates on our multi-family book. Higher rates may reduce the ability of multi-family borrowers to refinance their loans prior to maturity when they typically have a balloon payment due. Our near-term maturities remain low, roughly 2% of our multi-family book is expected to mature in 2024, and approximately 3.5% is expected to mature in 2025. Elevated interest rates also result in higher monthly payments for borrowers with adjustable rate mortgages, which may lower their debt service coverage ratios. As of the end of December, adjustable rate mortgages made up about 9% of our multi-family book. Our multi-family serious delinquency rate increased to 46 basis points as of December 31, 2023 from 24 basis points as of the same time the prior year, driven by stress in our seniors' housing loans. We actively pursue loss mitigation actions when appropriate, such as loan workouts, which may resolve delinquencies. If appropriate workouts cannot be achieved, the loans are foreclosed upon. Our multi-family serious delinquency rate as of December 31 is down from the recent peak of 54 basis points as of September 30, because of these loss mitigation actions and foreclosures. We expect these activities will continue into 2024, which may further decrease our multi-family serious delinquency rate. Our primary form of multi-family risk sharing is our delegated underwriting and servicing, or DUS program, which shares risk on the loans we acquire with our network of DUS lenders. In addition to this risk sharing in 2023, we completed two multi-family credit risk transfer transactions, which transferred a portion of the credit risk on nearly $31 billion of unpaid principal balance at the time of the transactions. Turning to capital as of the end of the year, we remain significantly undercapitalized with a $243 billion shortfall to the amount of capital needed to be fully capitalized. This was a $15 billion improvement, compared to the $258 billion shortfall at the end of 2022. Before we close out today, I'll share some thoughts on our macroeconomic outlook for 2024. Our economists have replaced their call for a modest recession with an expectation for positive, but below-trend growth in 2024. However, heightened uncertainty and significant downside risks, including geopolitical risks, remain and in their view, the economy still faces a higher than normal risk of recession. The market expects the Federal Reserve to cut interest rates this year, which we believe will lead to a further pullback in mortgage rates. We currently expect the 30-year fixed rate mortgage rate to average 6.1% in 2024, while affordability challenges, the lock-in effect, and a low inventory of homes available for sale will likely persist, single-family home sales are expected to begin a slow recovery. Because of this, we expect single-family mortgage originations to grow from $1.5 trillion in 2023 to nearly $2 trillion in 2024. Purchases are likely to continue to dominate the market given the rate environment, and we estimate they will make up approximately 75% of single-family mortgage originations this year. In the multi-family market, we expect to continue to see similar trends in 2024 that we saw last year. Given elevated interest rates, abundant supply in some markets, and muted rent growth, we believe multi-family housing starts will likely decline this year. We expect rent growth to remain below recent averages in the 1% to 1.5% range in 2024 as a result of rising levels of consumer debt, elevated new construction completions, and anticipated slowing job growth. Multi-family origination volumes are expected to remain subdued in 2024 at between $295 billion and $325 billion. I invite you to visit our web pages where you'll find a financial supplement with today's filing that provides additional insights into our business. Thank you for joining us today.

Operator: Thank you, everyone. That concludes today's call. You may disconnect.

End of Q&A:

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