Fannie Mae's (FNMA) CEO Timothy Mayopoulos on Q2 2016 Results - Earnings Call Transcript

| About: Fannie Mae (FNMA)

Fannie Mae (OTCQB:FNMA) Q2 2016 Earnings Conference Call August 4, 2016 11:00 AM ET

Executives

Maureen Davenport - Senior Vice President and Chief Communications Officer

Timothy Mayopoulos - President and Chief Executive Officer

Analysts

Joe Light - Bloomberg News

Operator

Good morning. Thank you for joining Fannie Mae's Second Quarter 2016 Financial Results Media Call and Webcast.

I will now turn it over to your host Maureen Davenport, Fannie Mae's Senior Vice President and Chief Communications Officer. Ma’am you may proceed.

Maureen Davenport

Thank you. Good morning everyone. Thank you for joining the media call and webcast to discuss Fannie Mae’s second quarter 2016 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 section in the company's second quarter 2016 Form 10-Q filed today and 2015 Form 10-K describe the 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 web site. We ask that you do not record this call for public broadcast, and that you do not publish any full transcript of thereof.

Following the remarks from Fannie Mae's President and Chief Executive Officer, Tim Mayopoulos, we will open the media conference lines for questions from reporters. Those of you participating via webcast, your lines will be muted throughout the call.

If you are a reporter and would like to ask a question, please press star and then one on your touchtone telephone. In order to answer as many questions as possible we ask that reporters only ask one question. All lines will be muted unless you're asking a question.

And now I'd like to turn the media conference call over to Fannie Mae’s President and Chief Executive Office, Tim Mayopoulos.

Timothy Mayopoulos

Thanks, Maureen. Good morning everyone. Thanks for joining us today as we share our financial results for the second quarter of 2016. We had another quarter of solid financial performance. We are carrying through on actions to strengthen our company, support the housing market, and bring innovations to the market for the benefit of consumers, lenders and taxpayers.

We also remain a steady continuous source of mortgage financing to ensure broad access to quality rental housing and predictable long-term mortgaged including the 30-year fixed rate mortgage. I’m pleased with the underlying fundamentals of our business including revenues and the credit quality of our book remained strong. Because of these strong fundamentals, we expect to remain profitable on an annual basis for the foreseeable future.

As we’ve said in the past, there are factors that we do not control such as changes in interest rates and home prices, and each factors can cause significant volatility in our financial results, and can have a positive or negative effect in any given quarter.

Once again, we saw some of that volatility this past quarter. Decreases in longer term interest rates caused us to experience fair value losses on the derivatives that we use to manage risk from interest rate changes. These losses however, were left in the fair value losses we experienced in the first quarter.

Let me summarize the primary drivers of our second quarter results and then provide an update on some specific areas of progress. For the second quarter of 2016, we reported net income of $2.9 billion and comprehensive income of $2.9 billion. Net and comprehensive income were up from $1.1 billion in net income and the $936 million in comprehensive income we reported in the first quarter of the year.

The increase in net income in the second quarter was due primarily to lower fair value losses on the derivatives that we use to manage risk from interest rate changes, higher credit-related income and higher revenues. The higher revenues were driven primarily by an increase in mortgage prepayments due to refinancing and seasonal increase in home sales.

Based on our second quarter results, we expect to pay Treasury $2.9 billion in dividends by the end of September. This will bring total cash dividends paid to Treasury to $151.4 billion compared with the $116.1 billion we received in support. As you know, under the terms of our agreement with Treasury, dividend payments do not offset prior draws.

As we have discussed in prior quarters, the amount of our permitted capital reserves declines each year until it reaches zero in 2018. The natural consequence of this is that future losses, including losses due to factors beyond our control could lead to a drop in Treasury.

These second quarter results built on the solid foundation we have laid these past several years to strengthen Fannie Mae and to make our housing finance system more sustainable. Let me highlight four areas of progress.

First, our improved underwriting standards, which we began implementing in 2008, means that our post-crisis book of business is strong and performing well. Our single-family serious delinquency rate for example, has decreased for 25 consecutive quarters, and was 1.32% as of June 30, 2016. This compares to a 5.47% rate as of the end of the first quarter of 2010.

Second, we continued to transform our business model by decreasing our reliance on the revenues generated by our retained mortgage portfolio, and increasing our reliance on our guaranteed fee revenues. These are the fees we collect on each mortgage that we guarantee against credit loss, and put into our mortgage-backed securities. These fees are a more reliable and stable source of revenue and less subject to interest rate and market volatility for those generated by our portfolio.

Third, we also continue to mature our credit risk transfer capabilities, laying off credit risk to private capital where it makes sense. This decrease is exposure for taxpayers and pulls more private capital into the market. Investors continue to be attracted to these transactions, because they understand that we have developed world-class capabilities to assess credit risk, manage loan servicers, and minimize losses. Through the second quarter, we transferred a significant portion of the credit risk on more than $650 billion in unpaid principal of mortgage loans.

The fourth area of progress we want to highlight is the innovation we are bringing to the market for the benefit of consumers, lenders and taxpayers. Over the course of the past 25 years, technology has transformed almost every industry, some more than once. Until recently however applying for a mortgage, closing on a mortgage, and making the monthly mortgage payment reconcile much like it did in the 1990s. That is rapidly changing. Technology is dramatically raising the bar on what consumers expect from the mortgage experience. Our job is to help our lender partners to meet those expectations.

We are working to provide smart tools to give lenders real time verification of the key components for the credit quality of the loans that we acquire. These tools make it easier to do business with us, and provide our customers with more certainty for the loan sold to us or stay sold. We are also bringing innovations to market to expand access to credit for qualified borrowers. Years of experience including the housing crisis has taught us a lot about how to expand access to credit for creditworthy borrowers in ways that are safe and sustainable. We are using those learning’s to bring solutions to the market that meet the needs of customers and our customers’ customers.

Finally, in a quarter characterized by a lot of uncertainty in world markets and turmoil on the broader world stage, we continue to serve as a steady continuous source of financing for quality rental housing and predictable long-term mortgages that constitute the core of our business. We were the largest provider of liquidity to the mortgage market in the second quarter, providing approximately $145 billion in financing that enabled families to buy, refinance and rent homes.

More than 75% of our single-family loans are long-term fixed rate loans, such as the 30-year fixed rate mortgage that we helped make possible. These mortgages remain the mortgage of choice for the vast majority of American homebuyers and homeowners looking to refinance. They have value for this certainty and predictability and because they give homeowners the ability to refinance when it makes sense for them and their families.

In summary, we are continuing to drive improvements in innovations both within Fannie Mae and in the broader market. These improvements in innovations are bringing real value to taxpayers, to our lender partners and to consumers. Most importantly, they strengthen our ability to fulfill our housing mission and support our customers across the nation through all market conditions.

I appreciate you being with us this morning, and I am happy to open up the call for your questions. Thanks.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from Joe Light with Bloomberg News. Your line is open, sir.

Joe Light

Hi, good morning. Thanks for taking my question. I was wondering if you could talk a little bit about your level of loan loss reserves and why they continue to be pretty high, I mean as you mentioned the - yes, it’s usual, [indiscernible] point since maybe 2008 give or take. Can you talk a little bit about I guess what would bring these reserves down, they are somewhere between like 8 and 10 times that they were back in 2007-2008, is that right?

Timothy Mayopoulos

Yeah, so why don’t I do this. David Benson, our Chief Financial Officer is here with me. Why don’t I turn that question over to him?

David Benson

Hi Joe, you are correct. The reserves are quite a bit larger than they were pretty quantitative [ph]. The vast majority of the reserves are due to the loans that have been modified, and we have as you know a quite large population of loans that through the crisis that we modified and they own our balance sheet. Those generate a fair amount of reserves required under GAAP, and we would expect to have elevated reserves for those loans we have, elevated levels of those loans on our balance sheet.

Operator

Thank you. Our next question is from [indiscernible] with National Mortgage News. Your line is open, ma’am.

Unidentified Analyst

Yes, I wondered if the plans to, it sounds like securitizing some of those modified loans might help provide any relief from that having to reserve.

Timothy Mayopoulos

We do that plans to re-securitize those loans and overtime put those securities out into the market. But let me have David explain to you why we won’t have a major impact on reserves.

David Benson

Yeah, what we plan to do is to put some of these modified loans into Fannie Mae mortgage-backed securities. When we do so, we will guarantee those securities, and therefore the loans will actually still be consolidated on our balance sheet.

Unidentified Analyst

Okay.

David Benson

And therefore the reserves will continue to remain. The only time the reserve - reserve release would occur would be - we actually sold the loans and so it’s not that we put them into a guaranteed security.

Operator

Thank you. [Operator Instructions] At this time, we have no further questions. I’ll turn the call back over to you, sir.

Timothy Mayopoulos

Thank you very much. Thank you all for your time this morning. Hope you have a great day. Take care.

Operator

That does conclude today’s conference call. We thank you all for participating. You may now disconnect, and have a great rest of your day.

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