Federal Home Loan Mortgage Corp
OTC:FMCC
Earnings Call Analysis
Q4-2023 Analysis
Federal Home Loan Mortgage Corp
In 2023, Freddie Mac emphasized its housing mission, aiding over 1.4 million families in purchasing, refinancing, or renting homes. Significantly, first-time homebuyers constituted roughly 51% of primary residence purchases, the highest percentage in three decades. Freddie Mac posted a net income of $10.5 billion for the year, up by 13% from the previous year, and comprehensive income reached $10.7 billion, marking a 19% increase. This financial success was largely due to a release of credit reserves prompted by an uptick in house prices.
Freddie Mac's full-year net revenues stood slightly lower, affected partly by a 7% drop in guarantee net interest income attributable to decreased deferred fee income resulting from slower prepayments as mortgage rates climbed. Noninterest income fell by 18% due to the absence of prior year's spread-related gains, while noninterest expense rose by 14%, with significant increases in net credit enhancement expense, partially as a result of higher cumulative CRT transactions and STACR note repurchases.
The company's total mortgage portfolio expanded to $3.5 trillion, up 2% from the previous year, led by growth in both single-family and multifamily portfolios. Net income for the fourth quarter soared by 65% to $2.9 billion, fueled by higher revenues and a credit reserve release due to improved house prices. Net interest income and noninterest income both contributed to the 11% increase in net revenues for the quarter, the latter propelled by higher multifamily guarantee income and net investment gains.
Freddie Mac's single-family segment reported an annual net income of $9 billion, a surge of 14% from the previous year because of a credit reserve release related to better house prices. The company expects house prices to grow modestly over the next two years, contrasting with previous expectations of decline. Despite higher interest rates reducing new business by 45%, the credit quality of the single-family mortgage portfolio remains robust. Notably, the serious delinquency rate has dropped to historical lows, and approximately 61% of the single-family portfolio enjoys some form of credit enhancement.
In the multifamily segment, net income increased by 5% to $1.5 billion, driven largely by an 18% rise in net revenues and a 32% jump in noninterest income resulting from lower fair value losses on guarantee assets. The multifamily delinquency rate climbed to 28 basis points, due primarily to an increase in delinquent loans in specific portfolios, though 94% of the total multifamily mortgage portfolio benefits from credit enhancements.
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Good morning, and thank you for joining us for a presentation of Freddie Mac's Fourth Quarter and Full Year 2023 Financial Results. I'm Jeff Markowitz, Deputy CAO and Senior Vice President of External Affairs and Corporate Communications. We're joined today by our Chief Financial Officer, Chris Lown.
Before we begin, we'd like to point out that during the call, Mr. Lown may make forward-looking statements based on assumptions about the company's key business drivers and other factors. Changes in these factors could cause the company's actual results to materially vary from its expectation. A description of these factors can be found in the company's annual report on Form 10-K filed today. You'll find the 10-K, earnings press release and related materials posted on the Investor Relations section of freddiemac.com. This call is recorded, and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcast or transcribed.
With that, I'll turn the call over to Freddie Mac's CFO, Chris Lown.
Good morning, and thank you for joining our call to review Freddie Mac's Fourth Quarter and Full year 2023 financial results. For the company, 2023 marked the year of continued progress. We put our housing mission at the center of all we do, helping more than 1.4 million families buy, refinance or rent a home in the past year. And of the more than 800,000 home purchases we financed in 2023, nearly 51% of those who purchased a primary residents were first-time homebuyers. That is the highest percentage of first-time homebuyers since Freddie Mac started tracking that statistic 3 decades ago. Freddie Mac achieved these mission-oriented goals while continuing to develop a strong and talented workforce, manage its risks and deliver solid financial results.
Now let's take a look at those results in more detail. This morning, we reported full year 2023 net income of $10.5 billion, an increase of 13% from the prior year and comprehensive income of $10.7 billion, an increase of 19% from the prior year. These increases were primarily driven by a credit reserve release in the single-family business, which resulted from an improvement in house prices in 2023. Full year net revenues of $21.2 billion were slightly lower than last year as the increase in net interest income was offset by lower noninterest income. Full year net interest income was $18.5 billion, a 3% year-over-year increase, driven primarily by higher investments, net interest income as a result of higher short-term interest rates.
The increase in investments, net interest income was partially offset by lower guarantee net interest income, which declined by 7% year-over-year. This was primarily driven by a decrease in deferred fee income as prepayments slowed due to higher mortgage rates. Noninterest income was $2.7 billion, down 18% year-over-year as the prior year period included spread-related gains on commitments to hedge the single-family securitization pipeline that did not recur in 2023. An improvement in house prices drove an $872 million benefit for credit losses this year versus a provision of $1.8 billion in the prior year. In 2022, the provision for credit losses was driven by deterioration in housing market conditions.
Our noninterest expense grew 14% year-over-year or $1.1 billion to $8.9 billion, primarily driven by an increase of $646 million in our net credit enhancement expense. The increase in our net credit enhancement expense was due to a higher volume of outstanding cumulative CRT transactions, combined with higher losses on STACR note repurchases as well as a decrease in our credit enhancement recoveries due to a decline in expected credit losses on covered loans. 2023 noninterest expense also includes an expense accrual of $313 million related to a previously reported adverse litigation judgment.
Our total mortgage portfolio grew 2% year-over-year to $3.5 trillion at the end of 2023, driven by a 2% increase in our single-family mortgage portfolio and a 3% increase in our multifamily mortgage portfolio.
Turning to our fourth quarter 2023 results. We reported net income of $2.9 billion, an increase of 65% from the fourth quarter of 2022. The increase in net income was primarily driven by higher revenues and a credit reserve release in the single-family business. Net revenues for the fourth quarter totaled $5.4 billion, an increase of 11% year-over-year, driven by an increase in both net interest income and noninterest income.
Fourth quarter net interest income of $4.8 billion was up 4% from the prior year quarter. This was primarily driven by an increase in our investments, net interest income, which benefited from higher short-term interest rates. Noninterest income for the fourth quarter was $604 million, an increase of 147% from the prior year quarter. This was primarily driven by higher multifamily guarantee income and higher net investment gains, which benefited from a decline in interest rates in the quarter and higher volume of single-family held-for-sale loan sales. Our benefit for credit losses last quarter was $467 million and was primarily driven by a credit reserve release in our single-family business due to an improvement in house prices.
In the prior year quarter, we had a credit reserve provision of $575 million that was driven by a deterioration in house prices. Noninterest expense for the fourth quarter was $2.2 billion, up $148 million or 7% year-over-year, primarily driven by a decrease in credit enhancement recoveries, which was due to a decline in expected credit losses on covered loans.
Turning to our individual business segments. Single-family reported full year net income of $9 billion, an increase of $1.1 billion or 14% from the prior year. This was primarily driven by a credit reserve release in 2023. The benefit for credit losses was $1.2 billion, driven by an improvement in house prices. In 2022, we had a provision expense of $1.8 billion, which was primarily driven by a deterioration in housing market conditions and a slowdown in actual house price appreciation. House prices increased 6.6% in 2023 compared to 4.9% in 2022. Our current forecast assumes house prices will grow by 2.8% over the next 12 months and 2% over the subsequent 12 months, whereas our December 2022 forecast assumed a decline of 3% in the next 12 months, followed by a decline of 1.8% in the subsequent 12 months.
The single-family allowance for credit losses coverage ratio at the end of the year was 20 basis points, down from 25 basis points a year earlier. Full year single-family net revenues of $18.3 billion declined by $484 million or 3% from 2022. This decline was primarily driven by lower noninterest income of $610 million, a decline of $1.1 billion year-over-year as the prior year period included spread-related gains on commitments to hedge the single-family securitization pipeline that did not recur in 2023. This decline was partially offset by higher net interest income of $17.7 billion, which increased 3% year-over-year, primarily driven by higher investments, net interest income, benefiting from higher interest rates, partially offset by lower deferred fee income driven by slower mortgage prepayments.
The liquidation rate on our single-family mortgage portfolio declined to 8.3% for 2023 versus 12.4% for 2022. Full year new business activity was $300 billion, down $241 billion or 45% from 2022 as both refinance and purchase activity declined due to higher mortgage interest rates. According to Freddie Mac's primary mortgage market survey, mortgage rates for the 30-year at the end of 2023 were 6.61%, up from 6.42% on December 31, 2022. Home purchase volume of $265 billion accounted for 88% of our total new business activity for the year.
As I noted earlier, first-time homebuyers represented 51% of new single-family home purchase loans. The average guarantee fee rate charged on new business was 56 basis points, up 5 basis points from 2022. The credit characteristics of our new business remains strong with an average estimated loan-to-value ratio of 78% and a weighted average credit score of 752. Our single-family mortgage portfolio increased 2% year-over-year to more than $3 trillion at the end of 2023. Our single-family portfolio credit characteristics remain strong, with the weighted average current loan-to-value ratio at 52% and the weighted average current credit score at 755.
Our single-family serious delinquency rate declined to 55 basis points as of December 31, 2023, down 11 basis points from 66 basis points at year-end 2022. The single-family serious delinquency rate remains historically low and is down 8 basis points from the pre-COVID rate of 63 basis points at the end of 2019. During the year, we helped approximately 81,000 families remain in their homes through loan workouts. Our loan workouts have continued to decline in line with the decline in the seriously delinquent loan population. At the end of the year, 61% of our single-family portfolio had some form of credit enhancement.
Moving to multifamily. The business reported full year net income of $1.5 billion, up 5% from the prior year, primarily driven by higher noninterest income. Full year net revenues of $3 billion increased 18% year-over-year. This increase was primarily driven by an increase in noninterest income, which increased 32% year-over-year to $2.1 billion, primarily driven by lower fair value losses on guarantee assets as a result of lower medium-term interest rates. The provision for credit losses for 2023 was $300 million, an increase of $231 million from 2022. The increased credit reserve build was primarily driven by heightened uncertainty and forecasted economic and multifamily market conditions as well as deterioration in overall loan performance.
Multifamily new business activity for the full year was $48 billion, a decrease of 34% from 2022 and below the FHFA cap of $75 billion. The decline in new business activity was driven by the overall slowdown in the multifamily origination market as higher rates reduced the demand for multifamily financing. For 2024, FHFA has reduced the cap to $70 billion with at least 50% of the activity to support mission-driven affordable housing. Our multifamily mortgage portfolio at the end of 2023 was $441 billion, an increase of 3% year-over-year. The multifamily delinquency rate was 28 basis points at the end of the year, up from 12 basis points at the end of 2022. This increase was primarily driven by an increase in delinquent loans in our senior housing and small balance loan portfolios. 89% of these delinquent loans have credit enhancement coverage, reducing our credit risk exposure. At year-end, 94% of the multifamily mortgage portfolio was covered by credit enhancements.
Our net worth increased to $47.7 billion at the end of the year, representing a 29% increase from 2022.
In conclusion, Freddie Mac made home possible for more than 1 million families in 2023, while delivering solid financial results. Looking ahead, we will continue to serve our mission while remaining safe and sound.