Freddie Mac (FMCC) CEO David Brickman on Q1 2020 Results - Earnings Call Transcript

Freddie Mac (OTCQB:FMCC) Q1 2020 Results Conference Call April 30, 2020 9:00 AM ET

Company Participants

Jeffrey Markowitz - Senior Vice President, External Relations & Corporate Communications
David Brickman - Chief Executive Officer
Ricardo Anzaldua - General Counsel
Donna Corley - Head of Single-Family
Donald Kish - Acting CFO
Jerry Weiss - CAO

Conference Call Participants

Elizabeth Dexheimer - Bloomberg

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Freddie Mac First Quarter 2020 Financial Results Call. At this time, all participant lines are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. [Operator Instructions]

I would now like to hand the conference over to your speaker, Jeffrey Markowitz, Senior Vice President of External Relations and Corporate Communications. Please go ahead, sir.

Jeffrey Markowitz

Thank you, and good morning, and thank you for joining us for a discussion of Freddie Mac's first quarter 2020 financial results. We're joined today by our CEO, David Brickman; General Counsel, Ricardo Anzaldua; Head of Single-Family, Donna Corley; and Acting CFO, Donald Kish and CAO, Jerry Weiss.

Before we begin, we'd like to point out that during this call, Freddie Mac executives may make forward-looking statements which are based on a set of assumptions about the Company's key business drivers and other factors. Changes in these factors could cause the Company's actual results to vary materially from its expectations. A description of these factors can be found in the Company's quarterly report on Form 10-Q filed today.

Freddie Mac executives also may discuss non-GAAP financial measures. For more information about those measures, please see our earnings press release and related materials which are posted on the Investor Relations section of freddiemac.com. Our commentary today will be limited to business and market topics. As you know we cannot comment on public policy or legislation concerning Freddie Mac.

The call is being recorded and a replay will soon be available on freddiemac.com. So we ask that this call not the rebroadcast or transcribed. At the end of Mr. Brickman’s prepared comments, we will open the call for questions that pertain only to the earnings statements just released. There will be no Q&A on any other topics. As a reminder, this call is for the media and only they may ask questions.

With that, I will turn the call over to David Brickman, Freddie Mac’s CEO.

David Brickman

Thank you, Jeff, and good morning. Welcome to our first quarter earnings conference call. Today's discussion will cover the following items, the Company's response to the COVID-19 pandemic, Freddie Mac’s first quarter financial and business results, and our outlook on these uncertain times. But I want to first start by saying that I hope everyone on this call and all of your families are staying safe and remaining positive during these challenging times.

To frame this morning's discussion and highlight both the unprecedented environment in which we are operating and the significant stress in both our country and our markets, I think it is worth reviewing the news we were received just in the last week, a relatively uneventful week I might add by comparison to past periods in a situation we find ourselves in.

First, as we just heard this morning, jobless claims have risen by 3.84 million to more than 30 billion over the past six months, an unprecedented increase in unemployment. Second, new home sales fell 15.4% to a seasonally adjusted annual rate of 627,000 units last month, the largest percentage decline since July, 2013.

On the rental side, a survey by a rental technology company, Avail says that 54% of renters are out of work, and estimates from Amherst Securities and the Joint Center for Housing Studies at Harvard put the potential need for rental support as high as $7 billion per month.

And finally, let me speak generally about forbearance in this time of crisis. We have been working hard to ensure that borrowers and lenders are familiar with the forbearance options that are available to them, and we’re seeing the number of forbearance requests increase significantly in both the Single-Family and Multifamily businesses; and we expect those numbers to continue to rise. We are closely watching them and know that many are keenly interested in learning more about where those numbers stand, and we hope to have more to say about them in the near future.

In spite of all this, I’m pleased to report that, so far, our book is generally performing well, and we are withstanding this crisis. We have acted quickly to provide direct relief to millions of homeowners and property owners and indirectly to renters hurt by the pandemic. We are also looking to support our lender partners by making it easier for them to close and sell us loans.

Let me spend a few minutes explaining some of the things we have done. For homeowners who are unable to pay their mortgages due to pandemic-related financial hardships, we have offered relief designed to help them stay in their homes through and beyond this difficult time. Here are some of the actions Freddie Mac has taken through its servicers.

We have suspended all foreclosure actions and evictions of borrowers living in Freddie Mac-financed homes. We have provided mortgage payment forbearance for up to 12 months. We have instructed servicers to waive all penalties and late fees. And, we have offered loan modification options to lower borrowers’ payments or keep them the same after forbearance.

In the rental market, we took action to provide relief to multifamily property owners with as many as 4.2 million renters in more than 27,000 rental properties across the nation. The CARES Act has strengthened this action, now protecting all renters in GSE-backed properties from eviction for nonpayment of rent for 120 days.

The forbearance, we provide to multifamily owners alleviates some of the cash flow pressure they might otherwise have faced and enables them to more comfortably provide accommodations to their tenants. While that is good news, the fact remains that our toolbox to help renters in financial distress is limited. Regardless, we are educating renters about their options through various outreach efforts, including a newly-launched consumer website and counseling services.

We also have taken action to support lenders so they in turn can help more families either purchase or keep their homes. In short, we quickly made selling loans to us easier and faster, so funds continue to flow through the system to borrowers.

In the single-family business includes, allowing potential homebuyers to provide alternative documents in lieu of employment verification, which may be difficult to obtain, allowing appraisal alternatives, which reduces the need for appraisers to inspect the interior of a home, expanding our Automated Collateral Evaluation, which will allow us to conduct more automated appraisals, again, to promote social distancing, and maintaining liquidity to mortgage markets by temporarily purchasing loans from lenders where the borrower has been granted forbearance due to COVID-19.

For our multifamily lenders, we have announced a number of policy changes that provide unprecedented flexibility, so that appraisal and inspection decisions can be made on a case-by-case basis to protect the safety of landlords, renters and our staff. We are also doing our part to help other market participants. For example, we have taken steps to shore up the vendors that help us keep the mortgage market functioning.

For our suppliers, we have accelerated our payment on invoices, so the more than 200 small and diverse businesses we work with receive payment from us at least 20 days earlier than the standard payment terms. Earlier access to these funds will help cash-strapped businesses make payroll and cover overhead expenses during the crisis. We, as a company, are very proud of this effort.

Let me now turn inward and talk a little about Freddie Mac's business continuity efforts. Early in the pandemic, we activated our crisis management team and continuity plans to ensure we will be there day in and day out for our customers, our investors and for the rest of the market, while also protecting our staff.

The results of our business resiliency action to-date have been outstanding. We've exceeded our own expectations in terms of our ability to seamlessly maintain continuity in all of our business operations. So far, Freddie Mac has experienced no significant operational or technology issues associated with the pandemic, despite nearly 99% of our employees working remotely.

Taking a step back, these efforts highlight an important fact. Freddie Mac is open for business, both in terms of the extraordinary steps we have taken and continuing to fulfill our day-to-day mission. We continue to purchase loans in every market, every day.

We are continuing to bring new multifamily security issuances to market. We priced several K-Deals over the past month and expect to continue doing so in the weeks ahead. And we have been in the market with new issuances of single-family mortgage-backed securities as well.

Our response to the pandemic shows how far we have come as a company from the 2008 Financial Crisis, throughout the recent events, Freddie Mac has been a stabilizing force in the U.S. housing finance system, demonstrating that we are a very different company than the one that entered conservatorship 12 years ago.

Now, let’s turn to our first quarter financial results. We earned comprehensive income of $0.6 billion, a decrease of $1.8 billion compared with the fourth quarter 2019. The decrease from the prior quarter was driven by higher credit-related expense of $1.1 billion, or $0.9 billion, after-tax, due to higher expected credit losses as a result of the pandemic; lower gains on single-family asset disposition activity of $0.5 billion after-tax; and higher market-related losses of $0.3 billion after-tax, primarily driven by spread widening due to COVID-19.

The impact from interest rate changes this quarter was minimal due to our effective use of hedge accounting, and while our expected credit losses are higher due to COVID-19, they are being partially offset by expected recoveries from credit enhancements, like STACR and ACIS. As of March, CRT transactions, including STACR and ACIS, covered 51 percent of the single-family credit guarantee portfolio.

And although our GAAP net interest income was down from the prior quarter, our adjusted measures for net interest income and guarantee fee income, which more clearly reflect our sources of revenue, remained strong, both increasing slightly from the prior quarter.

Our total equity now stands at $9.5 billion, compared with $9.1 billion at December 31. The added capital strengthens our balance sheet in the face of this crisis, and it advances our goal of responsibly exiting conservatorship.

You’ll note that the increase in total equity, which typically tracks with our comprehensive income, was less than the $0.6 billion we earned. This is due to an adjustment to retained earnings made on January 1 related to our adoption of CECL, which totaled approximately $240 million.

Returning to CRT for a moment, Single-Family continued to transfer credit risk in the first quarter, completing CRT transactions that protect more than $140 billion of unpaid principal balance with maximum coverage of more than $5 billion.

Risk distribution also continued in Multifamily, our K-deal program was tested in the quarter and passed. In fact, Freddie Mac Multifamily successfully sold unguaranteed subordinate securities that did not benefit from our own guarantee or even the prospect of support from the government during a period of significant dislocation.

We also have maintained high levels of liquidity on our own balance sheet and we are positioning ourselves to be well prepared for challenges ahead related to underlying economic stress. We were able to access both short-term and long-term debt markets as needed. In the month of March, we issued approximately $55 billion of debt, with about $33 billion of it having maturities greater than one year.

We followed that up with an issuance of our Reference Notes in April, the second of the year so far, with the first in February. These issuances demonstrate that our access to funding markets remains intact and that we have the wherewithal to meet our financial obligations and meet the funding needs of customers.

Looking to our business results, we executed on our mission of providing liquidity, stability and affordability to the housing market. In the first quarter, we helped more than 630,000 families own or rent a home by providing nearly $152 billion in funding to the mortgage market. We purchased 526,000 home loans, including loans to nearly 87,000 first-time homebuyers.

We financed 111,000 rental units, 96 percent of which were affordable to families earning at-or-below 120 percent of area median income. And, all of this is beyond the borrowers and renters we helped keep in their homes through the extraordinary measures I discussed earlier.

The challenge now becomes keeping up that momentum through deeply uncertain times, which brings me to our outlook for the housing market for the rest of the year. We expect the COVID-19 pandemic to have a significant effect on our business into 2021 and perhaps beyond. With large parts of the U.S. economy shutdown to fight the pandemic, the housing market faces its greatest challenge in more than a decade.

Based on our current assumptions, we expect home sales to fall significantly this quarter, and then begin to recover over the next year. While home prices increased in the first quarter, the future effect of the COVID-19 pandemic is highly uncertain and dependent on the pace of economic recovery. The decline in home prices could be significant if forbearance and foreclosure mitigation do not limit the effect on home prices.

In addition, the Federal Reserve’s purchases of mortgage securities have helped stabilize mortgage markets and lower mortgage rates. We expect rates to remain low over the next two years and result in an increase in mortgage refinance activity that largely offsets the decline in purchase money mortgages. We expect serious delinquency rates and the volume of loss mitigation activity to increase significantly in the near-term due to the pandemic.

And while we believe the forbearance programs that we announced represent effective loss mitigation in the short term, we will likely see higher delinquencies and defaults in the future as the underlying forbearance agreements end. This is in large part why our loan loss reserves have increased.

So in conclusion, clearly, we have some difficult and uncertain times ahead, but we remain steadfast, well managed and committed to our important role in the U.S. housing finance system and the U.S. economy.

I want to thank everyone we work with who has pulled together through this crisis. That includes not only the tireless team at FHFA, but also our customers, our investors and countless other market participants like real estate professionals, home builders and housing counselors.

I also want to thank the millions of homeowners and renters who put their faith in Freddie Mac, its lenders and servicers, as they struggled and in some cases continue to struggle through the hardship brought about by this crisis.

Finally, I want to thank the thousands of Freddie Mac staff who have soldiered on during an unprecedented time to ensure Freddie Mac remains open, open for business.

I will now take any questions.

Question-and-Answer Session

Operator

And thank you. [Operator Instructions] And our first question is going to come from Elizabeth Dexheimer from Bloomberg. Your line is now open.

Elizabeth Dexheimer

Thanks so much for taking my call. This is Elizabeth Dexheimer with Bloomberg. I was just wondering, if you can talk a little bit more about what happens at the end of the forbearance period? How does Freddie plan to fund P&I payments after those two months? Will you be issuing debt? Can you talk more about that, please? Thanks.

David Brickman

Sure. As you probably know, the FHFA did provide guidance earlier as the leaving loans in while they are in the forbearance period in securities. There is then a question what actually occurs after forbearance and you get into a series of options in terms of how that forbearance either results in a reinstatement or a repayment, potentially modification other options, and those different options then do affect what occurs with that loan.

In certain instances, they would continue to remain in the security in the mortgage backed security they're in, at which point we would not need to fund it. In certain instances, it might be required to be purchased out, in which case, we would buy it and fund it on our balance sheet with our debt. But it really does depend on both, when that's -- how long that forbearance period goes and up to a year and then what the outcome is at the end of that forbearance period.

Elizabeth Dexheimer

Thank you. And can you also give some more insight into what you are seeing on with the data with forbearance? You said that, you expect a forbearance request to rise. Any more color on how much, just really anything that you are seeing in terms of numbers of requests?

David Brickman

Unfortunately, we can't at this point in time. We are still collecting that information. We’re not in a position to be able to disclose it. We do hope to be able to provide more information the future. We know that people are keenly interested in it. For the time being, all I can do is point to the same third parties that I know that you’d probably see, which is Black Knight and others who are reporting on that -- on those statistics, but we do help provide more information in the future.

Operator

Thank you. And our next question comes from Dennis Holler [ph] from Inside Mortgage. Your line is now open.

Unidentified Analyst

I just had a quick question about the CRT. Kind of looking forward and looking back, what is the current of CRT? I know you just talk about it in report, but just curious if you have any more details as to when the markets kind of crashed? And what your expectations are in the future for CRT?

David Brickman

Sure, and thanks for the question. I might divide it first just into two pieces is, as I mentioned in my comments, through the first quarter we continued to do CRT and we have a significant amount of our book covered by CRT. And there's a difference between how we think those transactions will perform versus what we see in terms of liquidity in the market and the ability to issue in the future.

I'll start by first addressing what we already have outstanding and we expect those deals to perform as expected and continue to be effective mechanisms for us reducing the risk that we've got, which is why as you can see in the financial results. We have offsets to our provisions related to recoveries we expect on CRT. So, I'm very pleased with how the existing book of CRT we've issued has performed. You're asking that about the liquidity in that market, and like every higher risk asset for that matter, virtually every asset, it experienced significant volatility over the last several weeks, there is limited liquidity in that space.

We have noticed with lots of similar products where spreads increase significantly, prices went down, they are recovering a bit. I don't know that I want to speculate exactly on where market activity might go over the remainder of the quarter. But based on the market, as we see it, and the hope that it will continue to recover, we expect to continue to rely heavily on CRT as a strategy for us to help manage our risk. And thank you for the question.

Operator

Thank you and I am showing no further questions. So, I would now like to turn the call back over to Jeff Markowitzfor further remarks.

Jeffrey Markowitz

I want to thank everybody for joining us and we look forward to talking with you again next quarter.

Operator

And thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.