Fannie Mae (OTCQB:FNMA) Q4 2015 Earnings Conference Call February 19, 2016 8:00 AM ET
Tim Mayopoulos – President and Chief Executive Officer
Joe Light – The Wall Street Journal
Paul Muolo – Inside Mortgage Finance
Brian Collins – National Mortgage News
John Carney – Wall Street Journal
Thank you for joining the media call and webcast to discuss Fannie Mae’s Fourth Quarter and Full Year 2015 Financial Results. Please note that this call may include forward-looking statements, including statements about the company’s future performance, business plans and strategy.
Future events may turn out to be very different from these statements. The risk factors and forward-looking statements sections in the company’s 2015 Form 10-K filed today describe factors that may lead to different results. As a reminder, this call is being webcast and recorded by Fannie Mae and the recording may be posted on the company’s website. This call cannot be recorded for broadcast by any participant other than Fannie Mae.
Following remarks from Fannie Mae’s President and CEO, Tim Mayopoulos, we’ll open the media conference call line for questions from reporters. Those of you participating via webcast, your lines will be muted throughout the call. [Operator Instructions] In order to answer as many as questions possible, we ask that the reporters only ask one question. All lines will be muted unless you are asking a question.
And I’d now like to turn the media conference call over to your host, Tim Mayopoulos. Thank you, please go ahead.
Thank you, and good morning, everyone. Thanks for joining us today as we share our 2015 financial results. We had another strong year of financial performance in 2015. We also continue to drive improvements to both our company and the broader housing finance system. The fundamental changes we’re making allow us to better serve today’s market and better anticipate tomorrow’s needs. We are transforming our business and we are delivering greater value to our single family and multifamily vendors [Audio Gap] change in 2016.
Let me summarize our full year and fourth quarter results and then update you on some specific areas of progress. We reported annual net income of $11 billion and comprehensive income of $10.6 billion for 2015. This was our 4th consecutive year of profitability. Our net income is down from the $14.2 billion we reported for 2014. The decrease is due primarily to a substantial reduction and income from settlement agreements relating to private-label mortgage-related securities sold to us, as well as a shift from credit-related income in 2014 to credit-related expense in 2015. These decreases will partially offset by lower fair value losses on the derivatives that we used to manage risk from interest rate changes.
For the fourth quarter of 2015, we reported net income of $2.5 billion and comprehensive income of $2.3 billion. This is an increase in our quarterly net income from the $2 billion we reported in the third quarter. The increase is due primarily the fair value gains on our derivatives compared with the value losses in the third quarter. The increase in our fourth quarter net income was partially offset by a provision for credit losses spending from interest rate increases, a slight decline in home prices and our redesignation on some of our nonperforming loans from held-for-investment to held-for-sale.
As we noted in our 10-K filing, we expect to remain profitable on an annual basis for the foreseeable future. Nonetheless, there are substantial factors that we do not control, such as changes in interest rates or home prices. These factors can result in significant volatility in our financial results from quarter-to-quarter or year-to-year.
Based on our fourth quarter results, we expect to pay Treasury $2.9 billion in dividends by the end of March. This will bring total cash dividends paid to Treasury to $147.6 billion compared with $116.1 billion we received in support. It is of course important to note, that our dividend payments do not offset prior draws. Nonetheless, in 2015 alone we paid a total of $10.3 billion in dividends to Treasury. As you may recall, the amount of our committed capital reserve declined each year until it reaches zero in 2018. The natural consequence of this is that we will have an ever small accretion to absorb potential losses.
Overall, I’m very pleased with our financial performance in 2015. We have made fundamental changes to our business to address issues that came up during the crisis. We’ve put in place stronger underwriting, eligibility and risk management standards to protect tax payers. We have built a strong and profitable new book of business. We have made possible of 30-year fixed-rate mortgage, which continues to be America’s most profitable mortgage because it gives homeowners predictability, uncertainty and the option to refinance at any time.
We also continue to help homeowners who are struggling, providing approximately 122,000 loan workouts in 2015, including approximately 94,000 loan modifications. Also in 2015, we focused more on the future, in implementing meaningful changes that will bring our company and all housing finance forward.
Let me highlight three areas of progress. First, as we make decisions about our business, we are putting lenders and other partners we serve at the center of everything we do. You can see this recommitment to our customers and the new technology tools we introduced and enhanced in 2015. These new solutions are helping our customers bring the experience of applying for mortgage, closing on a mortgage and paying a mortgage into the 21st century. These tools are also making it easier and more certain for customers to access and manage the risk in mortgage originations.
Second, the changes we have made on empowering our customers to provide more borrowers and lenders with affordable, sustainable mortgage and rental options. We’ve provided approximately $516 billion in liquidity to the mortgage market in 2015. This financing enabled approximately 1 million home purchasers in 2015 and almost 1.2 million refinancings. We also financed 569,000 units of multifamily housing. New affordable lending products, such as our Home Ready mortgage are giving our customers added flexibility so they can reach new credit-related borrowers. On the multifamily side, DUS Gateway, our new transaction platform is helping our lenders serve the widest possible spectrum of the multifamily market.
The third area of progress I want to highlight is the fundamental evolution of Fannie Mae’s business model. These changes increase the safety and soundness of our company and housing overall. We have shifted to a new model and increasing portion of our net interest income comes from guaranty fees rather than interest income from our retained mortgage portfolio. In 2015 approximately two-thirds of our net interest income came from our guaranty business. The source of revenue is stable, reliable, and predictable.
We also have created a new important market for credit risk transfers in just over two years. Today we’re taking a significant portion of the risk on some of our recently acquired loans and distributing it to private capital. Through 2015 we transferred a significant portion of the credit risk on over a $0.5 trillion of loans. This reduces the role of government, it reduces risk for taxpayers, and it expands the role of private capital in America’s mortgage market.
In closing I believe that in 2015 the direction of events, both at Fannie Mae and in housing finance generally was clear and unmistakable, important change is happening. We believe this dynamic will continue in 2016 as we execute on top of our customers and partners, drive further improvements to our company, and deliver on our housing mission. We are proud of our work to make home available to millions of Americans, and we will keep pushing forward in 2016 and beyond.
I appreciate your time and I’m happy to open this up now for your questions.
Thank you. [Operator Instructions] Thank you. Our first question comes from Joe Light, The Wall Street Journal. Your line is open.
Hi, good morning, thanks for taking my question. I was wondering if you could talk a little bit about the – I guess, the effect of having zero dollar capital buffer in 2018? And also about this idea, when will investors who rely on Fannie’s guaranty start to kind of question the reliability of that guaranty, as your remaining funding commitment shrinks assuming that there’s some sort of drawn to future? Is this a sort of problem that starts very soon after you don’t have a capital buffer? Or is it once that funding commitment gets strung down by a large amount? How do you guys think about that?
Good morning, Joe. It’s good to hear from you. Look, first of all, let me say that the fact that we have a modest capital cushion is not a new event. That’s been in place for quite some time under the terms of the preferred stock purchase. That number has been declining, by $600 million each year of the last few years, and that will get to zero as of beginning of 2018. It does remain under the preferred stock purchase agreement with treasury over $170 billion of available credit for Fannie Mae. So, obviously it’s not insignificant amount of money.
So, I think that [indiscernible] spoke about this issue yesterday. I think he quite appropriately was drawing the attention of policymakers and others to this question saying that, this is an issue that needs to be addressed, but I think he’s also trying to do that in a way that indicates – indicating that this an issue that needs to be addressed in the foreseeable future, but that is not an imminent issue that should cause any kind of disturbance in the market. So I think for the foreseeable future, market rates will manage this just high, but I do say that the Director is appropriately saying, that this is an issue that needs to be addressed and want to make some sort of adverse market reaction.
Thank you. Your next question comes from Paul Muolo, Inside Mortgage Finance. Your line is open.
Hi, good morning. Thanks for taking my question. We asked the same question yesterday for Freddie Mac, are you guys doing anything different in regard to hedging that might – even now your results are little better in light of these wild interest rate moves we’ve seen lately.
So, the short answer to that is, no. We’re not doing anything different. We manage our business to get best economic results we can for tax payers over the long haul. We’re not trying to manage through accounting results or managing through economic results. We’d say that one area where we are focused is that we have a substantial number of loans on our balance sheet that we had bought out of mortgage-backed securities trust in order to modify them, and to have them reperform.
We do had a sizable book of these reperforming loans, and we do manage the interest rate risk of them through the use of risk management derivatives. But the existing of those loans on our balance sheet does produce some accounting volatility in our financial results. And our goal is over the next year or two to try to resecuritize those loans and put them out to the marketplace to try to reduce the potential volatility in our financial results. So that is one tangible thing that we are doing to try to reduce volatility in our earnings results. But we are not doing anything differently in terms of the hedging practices that we engage in where we’re trying to manage to an economic result, not to an accounting result.
How much end loans would be over the next year or two? Any dollar amount on those resecuritizations?
No, we’re not commenting on the amount that we might be securitized, but that’s an area of focus for us going forward.
All right. Thanks.
Thank you. One moment please for your next question.
Thank you. Our next question is from Brian Collins, National Mortgage News. Your line is open.
Good morning. Over a year ago, you guys were talking about starting up your 3% down payment program. I was kind of wondering how that turns out now that your have some experience with it.
Thanks for that question. Yes, we did launch a new and improved 3% down payment 97% LTV loan product. To-date we had about 24,000 loans delivered to us from about 700 different lenders. So we’re very encouraged by that that there is a wide use of this product by the lender community. But obviously with only 24,000 loans, which is about 1% of our total acquisitions over that time period, it’s still a modest portion of our total credit book. It’s still too early to tell – to conclude how those loans will ultimately perform. But frankly we’re not seeing any surprises in them, but the quality of what we are receiving is consistent with what we anticipated.
So we are still – with that product, while we went in 97% LTV, we are still using the same underwriting standards that we have in the past. We require those loans to be submitted to us through desktop underwriter, which is an automated underwriting tool. We ensure these loans are properly documented. So we feel very comfortable with the underwriting practices associated with these loans. But given the relatively small size of the deliveries and the relative movements of those deliveries, it’s still too early to conclude exactly how they’ll perform.
Is the fact that FHA reduced their premium? Does that make it comfort to compete in that go down payment market?
I do believe that the fact that FHA reduced their mortgage insurance premium then that we receive pure deliveries than we would have otherwise. Obviously, vendors are required to deliver a best execution to borrowers, and if they can get a better price from FHA, they should channel those files to an FHA product. So at the time we announced the product, FHA’s pricing was higher than it is today. And I do believe that will cut into the total amount of deliveries that came to us.
Thank you. Your next question is John Carney, Wall Street Journal. Your line is open.
Hi, thanks very much, I really appreciate you guys doing these calls. My question is you said that, one of the reasons that your annual income was lower than the previous year was lack of legal settlements. [Indiscernible] I am surethis looks like a pretty clean, good quarter and that there’s nothing sort of weird or [indiscernible]. So, is it right to look at this as an example of a certain normal earnings year for Fannie Mae?
With the caveat that it’s hard to predict what will be a normal environment, given what’s going on in the world in so many different ways. I do think that 2015 generally and certainly the last quarter of 2015 does reflect what the likely earnings results would be for Fannie Mae in a given year or in a given quarter absence unusual events, such as the big litigation results or wild interest rate movements or substantial home price appreciation or depreciation. I think it does reflect kind of a – if one can say that’s a kind of a business as usual sort of period of results.
Thank you, again. [Operator Instructions] Thank you. Please stand-by for your next question. Thank you, again. [Operator Instructions] All right, we are not taking any further questions at this time. I’d like to turn today’s conference back over to Tim Mayopoulos. Thank you, sir.
Thank you, all. We appreciate your time and attention this morning. I appreciate your questions, and I hope you all have a great day. Thanks a lot.
Thank you for your participation. That does conclude today’s conference. You may disconnect at this time.
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