Federal National Mortgage Association
OTC:FNMA
Earnings Call Analysis
Q3-2023 Analysis
Federal National Mortgage Association
As we delve into the story of the most recent earnings call, the macroeconomic environment presented both challenges and opportunities. The U.S. economy demonstrated resilience with a robust 4.9% GDP growth, even as inflation lingered nearly two percentage points above the Federal Reserve's target. This economic vigor led to divergent narratives in real estate: established homeowners enjoyed increased equity due to rising home prices, while potential first-time buyers especially those with modest means faced daunting high prices and mortgage rates as high as 7.8%.
In terms of financials, the company reported $4.7 billion in net income, a decrease from the previous quarter's figure by roughly $300 million. However, revenues remained strong at $7.3 billion, bolstered by an increase in net interest income to $7.2 billion. This quarter's financial highlights include a credit reserve release of $652 million due to rising single-family home prices and an $800 million fair value gain associated with increasing interest rates. Offsetting these were write-offs and a notable $491 million litigation expense.
The company's provision of $106 billion in market liquidity illustrated its foundational role in the housing finance system. Helping over 428,000 households buy, refinance, or rent homes, including 159,000 multifamily rental units, a majority of which were affordably priced for low-to-moderate-income families, proved a profound impact. Initiatives included educational resources like the 'Strategies for Healthy Credit' course, and programs such as the multifamily sponsor-initiated affordability program to ensure long-lasting affordable housing.
The single-family loan acquisitions stood firm at $89 billion, demonstrating homebuyer persistence despite economic headwinds. This sector witnessed a significant share of purchases at 88%, the highest in over two decades. The credit health of these loans remained strong, signaled by a low single-family serious delinquency rate of 54 basis points. Multifamily acquisitions, although down year-over-year to $42 billion, depicted resilience with a weighted average original loan-to-value ratio of 59% and a debt service coverage ratio of 1.6x, maintaining a robust credit profile.
Despite the expectations of a mild recession being downgraded, the impacts of the rapidly rising interest rates remain a concern. With anticipated average mortgage rates of 6.8% next year, affordability pressures will likely intensify. Property values across multifamily units have dropped, increasing the serious delinquency rate to 54 basis points. However, loss mitigation and loan workouts are actively being pursued to navigate these issues. The projected home price growth remains optimistic at 6.7% for the year, albeit contingent on various assumptions.
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Good day, and welcome to the Fannie Mae Third Quarter 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.
Hello, and thank you all for joining today's conference call to discuss Fannie Mae's third quarter 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 forward-looking statements section in the company's third quarter 2023 Form 10-Q filed today and the Risk Factors and Forward-Looking Statements sections in the company's 2022 Form 10-K filed on February 14, 2023, 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 Halley.
Welcome, and thank you for joining us today. I'll touch briefly on the macro environment before reviewing our quarter's financial and mission performance. After that, our Chief Financial Officer, Chryssa Halley will discuss our quarterly results and economic outlook in more detail.
Economic data throughout the year has been stronger than expected, including in the third quarter, with GDP growing at a 4.9% annualized pace. While wage growth moderated, job growth remained robust. Inflation remains nearly 2 percentage points higher than the Federal Reserve's target rate and the 10-year Treasury ended the quarter at 4.6% and continued to thrive. That is why in housing, this year continues to remain a tale of 2 markets. It's a good market for homeowners who locked in low mortgage rates and have more equity in their homes due to rising home prices. Yet for homebuyers, especially consumers looking to buy their first home or those of modest means, it's a tough market, one that is burdened by high home prices, limited inventory and high mortgage rates.
In fact, for the third straight month, median existing home prices were up from a year ago and the 30-year fixed rate mortgage rate was most recently as high as 7.8%. Because of these factors in September, existing home sales fell, mortgage origination activity continued to be slow and consumer sentiment to buy a home was the lowest it has been in the history of Fannie Mae's home purchase sentiment index.
In the case of multifamily, higher interest rates and general market uncertainty have contributed to a decline in overall market activity and declining property values. And while the pace of growth has slowed year-over-year, rents are still at all-time highs. This is yet another example of the affordability challenges that consumers face. Despite this challenging macroeconomic backdrop, we remain committed to working with lenders to support renters and homeowners while effectively managing risks to our business.
Turning to the quarter. We reported $4.7 billion in net income. Contributing to our net income was a credit reserve release reflecting higher actual and forecasted single-family home prices. As a result, we continue to build our net worth through retained earnings which increased to just under $74 billion as of the end of September. This increase further bolstered our financial stability and enable us to continue being a reliable source of mortgage credit.
In fact, this quarter, we provided $106 billion in market liquidity. This helped 428,000 households buy, refinance or rent a home. This included 159,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of Area Median Income. We also helped over 106,000 first-time homebuyers to purchase a home.
So while liquidity is only one way Fannie Mae serves the market and works to make it better for everyone. Let me share a few examples. First, we provided educational resources to help renters and homebuyers address challenges they might face on their housing journey. This quarter, for example, we've launched the Spanish language credit course, Strategies for Healthy Credit on HomeView, our free online education tool.
We also recently refreshed our flood awareness survey that measures consumers' awareness and attitudes towards flood risk and insurance and we redesigned our flood-related content on fanniemae.com. Second, we continue to work with our partners to increase the creation and preservation of affordable rental housing, like we do with our multifamily sponsor-initiated affordability program, which incentivizes multifamily property owners to voluntarily establish income limits and set aside at least 20% of units as affordable to renters earning up to 80% of Area Median Income for the life of the loan.
Earlier this month, we built upon this program by launching our multifamily sponsor dedicated workforce housing initiative, which is aimed at conventional workforce housing providers. This program provides a pricing incentive to owners willing for the life of the loan to keep brands on at least 20% of units at level affordable to renters earning up to 80% of Area Median Income and up to 120% in certain high-cost areas.
And a final example of how we aim to help make the market serve everyone is the work we continue to do to identify new ways to attract capital to underserved markets. Like what we are doing in single-family where we provide mortgage-backed security disclosures that give investors insights into our mission activity. This information allows MBS investors to allocate their capital towards populations who have traditionally faced barriers to housing access.
While today's economic and geopolitical environment are uncertain, Fannie Mae's priorities are clear. We're focused on being a reliable source of liquidity and stability to the U.S. housing finance system, we are focused on making the housing market work better for everyone by advancing equitable and sustainable housing opportunities and we are focused on strong risk management and ensuring we are financially secured so that we can deliver on our mission.
I want to thank our dedicated teams for effectively managing risks while working with our partners across the housing ecosystem to support U.S. renters and homeowners. Now I'll turn it over to Chryssa to discuss our third quarter financial results.
Thank you, Priscilla, and good morning, everyone. As Priscilla mentioned, we reported $4.7 billion in net income in the third quarter, a roughly $300 million decrease compared to the second quarter of this year. Our third quarter revenues remained strong at $7.3 billion. We recorded $7.2 billion of net interest income, thanks to strong guaranty fees. This is $185 million higher than last quarter's net interest income.
We saw a credit benefit this quarter of $652 million, driven primarily by a release in reserves due to increases in actual and forecasted single-family home prices. This was partially offset by write-offs from loan redesignations due to our intention to sell a portion of the nonperforming and reperforming loans in our retained mortgage portfolio.
This is compared to a $1.3 billion credit benefit in the previous quarter that was also driven primarily by home price increases. Increases in interest rates drove around $800 million in fair value gains, nearly double the fair value gains in the previous quarter. In addition, we recorded a $491 million litigation expense related to a jury verdict and an award of prejudgment interest for Fannie Mae preferred shareholders in the third quarter.
Turning to a few single-family business highlights. We acquired $89 billion in single-family loans in the third quarter, which is flat compared to the second quarter. Given the interest rate environment, the share of our single-family acquisitions that were purchases climbed to 88%, the highest level we've seen for over 2 decades.
Our overall single-family book of business remains strong, with the weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 753. Our single-family serious delinquency rate remained near historically low levels. And as of September 30 stood at 54 basis points due to current economic conditions, including low unemployment and thanks to our underwriting standards and effective loan workout options for distressed borrowers.
As projected, a weakening economy may impact the credit performance of loans in our single-family guaranty business, which could lead to an increase in our single-family serious delinquency rate. In the third quarter, we transferred a portion of the credit risk on $49 billion of mortgages through our single-family credit risk transfer programs.
Now in multifamily. We acquired $16.4 billion of multifamily loans in the third quarter, which brings our year-to-date acquisitions to $42 billion compared to $51 billion at this time last year. This downward trend is consistent with 2023's lower overall market activity, driven by the uncertain market environment and higher interest rates.
Despite declining property values in the multifamily market, the multifamily loans we acquired year-to-date have a weighted average original loan-to-value ratio of 59%. These loans also had a weighted average debt service coverage ratio of 1.6x.
The overall credit profile of our multifamily book remains strong with the weighted average original loan-to-value ratio of 64% and a weighted average debt service coverage ratio of 2.1x. We continue to monitor the impacts of rising interest rates on our multifamily book. Rising rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due.
Roughly 2.5% of our multifamily book is expected to mature through the end of 2024. Rising interest rates will 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 September, adjustable rate mortgages made up about 10% of our multifamily book.
In previous calls, we've discussed our stressed multifamily seniors housing loans, particularly those that are adjustable rate mortgages. Our multifamily serious delinquency rate increased to 54 basis points as of September 30 compared to 37 basis points as of June 30, largely driven by seniors housing.
We are actively pursuing loss mitigation actions when appropriate. We expect that our multifamily serious delinquency rate may decrease as we complete loan workouts, which may resolve their delinquency; or if an appropriate workout cannot be achieved, the loans are foreclosed upon.
Before we close out, I'll touch on our current economic outlook. The strong economic growth Priscilla mentioned has reduced the likelihood of the mild recession we have expected next year. But we believe the full weight of the dramatic increase in interest rates has yet to be felt.
Mortgage rates, which we currently expect to average 6.8% in 2023, coupled with elevated home prices will continue to fuel an uneven supply demand dynamic in housing and put stress on affordability. Given the strong estimated home price growth of 6.9% in the first 9 months of the year, we project national home price growth of 6.7% for the full year.
Our expectations are based on many assumptions and our actual results could differ materially from our current expectations. 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.
Thank you, everyone. That concludes today's call. You may disconnect.