Federal National Mortgage Association
OTC:FNMA
Earnings Call Analysis
Q4-2023 Analysis
Federal National Mortgage Association
Welcome to a story of resilience and strategic response amidst economic turbulence. Fannie Mae has traversed the eventful year of 2023, demonstrating a notable performance during a period of unexpected economic strength. The U.S. economy, defying the odds, grew at an annual rate of 3.1%, outpacing the initial lackluster expectations set earlier in the year.
Navigating through a drastically altered housing market, Fannie Mae witnessed consumers' unwavering demand for homeownership. Mortgage rates, once at historic lows, have climbed, causing a 'lock-in effect' where borrowers prefer to stay put rather than refinance, leading to reduced homes for sale. Consequently, the single-family home prices defied predictions and climbed by 7.1%. Yet, mortgage originations staggered to $1.5 trillion, declining by 37% year-on-year. The multifamily sector echoed this strain, where subdued rent growth and over-supply in certain areas led to a significant decrease in mortgage originations to an estimated $255 billion to $275 billion.
The year forged Fannie Mae's fortitude as their net worth expanded to an impressive $78 billion, embodying the organization's financial stability. As a testament to their mission, they furnished $369 billion in liquidity, supporting 1.5 million households in their pursuit of buying, refinancing, or renting homes, with particular focus on low-income families. Innovative initiatives bolstered credit access, and modern valuation processes lowered upfront housing costs for many.
The financial narrative offers more than meets the eye with a $17.4 billion net income reported in 2023, a spike from the $12.9 billion in the previous year. Credit to the thriving home prices contributing to the release of credit reserves and a strong emphasis on retaining earnings and risk management.
On the single-family front, a near halving in loan acquisitions mirrored the lower refinance volumes, yet the book remains healthy with fixed rates cushioning borrowers against future rate hikes. Multifamily encountered its own hurdles, with an uptick in serious delinquency rates due primarily to pressures on senior housing loans. Nonetheless, active loss mitigation efforts showed promise, and the segment's sound credit profile stood firm.
Although still undercapitalized by $243 billion, a minor improvement has been observed from the previous year's gap. Looking ahead, expectations for 2024 are cautiously optimistic with below-trend growth forecasted, mitigated recession risks, and an anticipated average 30-year fixed mortgage rate of 6.1%. Market dynamics suggest a burgeoning in single-family mortgage originations to $2 trillion, while multifamily origination volumes may continue their languid performance owing to prevalent rent and supply imbalances.
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Good day, and welcome to the Fannie Mae Fourth Quarter and Full Year 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 Fourth Quarter and Full Year 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 risk factors and forward-looking statements sections in the company's 2023 Form 10-K filed today 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 C. Halley.
Welcome, and thank you for joining us today. I'll begin by spending a few minutes on the economic environment and then we'll turn to our financial and mission performance for 2023. After that, our Chief Financial Officer, Chryssa Halley, will discuss our full year and fourth quarter results in more detail. Let me begin with the economic environment. The economy held up much stronger in 2023 than we anticipated at the outset of the year. GDP grew at an annual rate of 3.1%, inflation came in at 3.2%, down from 7.1% in 2022, in part due to the 100 basis point increase in the Fed funds rate last year. This increase in rates had a direct effect on housing, our business and people we serve. 30-year mortgage rates reached a 23-year high of nearly 8% in October 2023 and averaged 6.8% over the full year. That was up 1.5 percentage points from the prior year.
The housing market is much different than it was just a few years ago. Back then, borrowers were able to access financing at historically low mortgage rates. Many of these borrowers set tight in their homes, thanks to the low rates they locked in during 2020 and 2021. This lock-in effect contributed to fewer homes available for sale. Despite this backdrop, home ownership is still in demand by many consumers and supply has not kept pace.
One outcome of this is that home prices in 2023 were more resilient than expected. Single-family home prices increased by an estimated 7.1%. You will hear these higher home prices as a theme in our annual results. In addition, overall single-family mortgage originations remained low at $1.5 trillion, a 37% decline year-on-year. The multifamily sector also faced challenges. Property values declined and the market saw significant new units in some areas, while in other areas, supply continue to be constrained.
At a national level, 2023 rent growth fell, and we expect that it turned negative in the fourth quarter. Even so, affordability continues to remain a challenge for renters in many parts of the country. Overall, multifamily mortgage originations declined substantially year-on-year to an estimated range of $255 billion to $275 billion compared to $480 billion in 2022.
Turning to our financial results. We reported $17.4 billion in net income in 2023 compared to $12.9 billion of net income in 2022. $3.9 billion of this was attributable to the fourth quarter. The strength in home prices throughout the year had a direct impact on our earnings, largely due to the release of credit reserves that reflected higher actual and forecasted home prices. We continue to manage our capital shortfall through retained earnings and our credit risk transfer program.
Our net worth increased to nearly $78 billion at the end of the year. This increase bolsters our financial stability and enables us to continue being a reliable source of mortgage credit for America's homeowners and renters.
In 2023, working with our partners in Housing Finance, we provided $369 billion in liquidity. This helped 1.5 million households buy, refinance or rent a home. This included approximately 189,000 low and very low income households. It also included 482,000 multifamily rental units, a significant majority of which were affordable to households earning at or below 120% of area median income. And we helped over 380,000 first-time homebuyers to purchase a home. In all this work, we are guided by our mission.
Let me share some examples of how we brought our mission to life in 2023, focusing on two key obstacles that many homebuyers face: Insufficient credit and upfront costs. First, regarding insufficient credit, we continued to use innovative ways to help the housing system see consumers with no or thin credit profiles. We're using on-time rent payments to help renters build and improve their credit scores. Through the end of last year, according to our vendors, we helped nearly 28,000 renters establish credit scores, and participating renters who already had a credit score and saw an improvement had an average increase of 35 points.
In our flagship automated underwriting system, Desktop Underwriter, we've made it possible for lenders to consider on-time rent payments and credit evaluations, or to assess the cash flow and creditworthiness of borrowers who don't have a credit score.
As to lowering upfront cost of housing, we continue to modernize the home valuation process by using models and analytics that allow us to offer less costly appraisal waivers and alternatives. Through these adoptions, low to moderate income borrowers saved an estimated $52 million in upfront costs in 2023. We're also giving lenders the option to use an attorney opinion letter instead of a traditional lenders title insurance policy on some transactions. And we increased the allowable loan-to-value ratios for 2 to 4 unit properties. This reduces upfront cost for these property types and preserves affordable rental housing.
While we still have a lot of work to do to make the housing system work for everyone, we're very proud with the progress we have made so far.
As I wrap up, 2023 marked Fannie Mae's 85th anniversary. As of September 30, we owned or guaranteed approximately 1 in 4 single-family mortgages and about 1/5 of multifamily mortgage debt outstanding in the United States. We take our responsibility seriously. Our mission guides us. The efforts we've taken to strengthen our business and our strong risk management focus are the foundation that allows us to deliver on our mission.
As we move into 2024, we remain dedicated to expanding housing opportunities in ways that are responsible and sustainable. Already this year, we've announced a $2,500 credit to eligible home-ready borrowers who made less than or equal to 50% of area median income, helping to address upfront costs for very low income borrowers.
We also announced enhanced single-family MBS disclosures, the Mission Index. This index provides insights into our mission activity allowing MBS investors to allocate their capital in support of affordable housing and underserved borrowers and markets.
Finally, before I turn it over to Chryssa, I want to thank our employees for making all we did in 2023 possible. The work they do matters. The work matters to the people who live in the homes and apartments we help finance. It matters to communities throughout the nation, and it matters to our housing partners.
Now Chryssa will discuss our full year and fourth quarter financial results.
Thank you, Priscilla, and good morning. As Priscilla mentioned, we reported $17.4 billion in net income in 2023 compared to $12.9 billion in 2022. Net revenues remained strong with $28.8 billion in net interest income, thanks mainly to healthy guaranty fee income. This is slightly lower than 2022's net interest income.
While our base guaranty fee income grew slightly in 2023, higher interest rates during the year drove a decline in deferred guaranty fee income due to lower refinance activity. This was offset by an increase in income due to higher yields on securities and our corporate liquidity portfolio, also driven by the higher interest rate environment.
We recognized a $1.7 billion benefit for credit losses in 2023, primarily due to stronger-than-expected actual and forecasted home prices. Conversely, in 2022, we recorded an over $6 billion provision for credit losses.
For the fourth quarter of 2023, net income was $3.9 billion driven by strong net interest income from guaranty fees and our corporate liquidity portfolio.
Now let me turn to our segments. Starting with single-family. We reported $14.9 billion in net income in 2023, an increase of $4.1 billion compared to 2022. This increase was driven by the release of credit reserves in 2023, while those reserves increased substantially in the prior year. Our reserve release was mainly due to an improvement in actual and forecasted home prices.
We acquired $316 billion of single-family loans last year, a nearly 50% decrease compared to 2022 and our lowest volume since 2000. Higher mortgage rates in 2023 drove refinance volumes to their lowest level since before 2000. In fact, our percentage of acquisitions that were purchased mortgages last year grew to 86%.
Our overall single-family book of business remains strong as of year-end with the weighted average mark-to-market loan-to-value ratio of 51% and weighted average credit score at origination of 753. Nearly 85% of our single-family book as of year-end had interest rates below 5%. So even if interest rates decline meaningfully, most of the borrowers whose loans are in our single-family book still would not be incentivized to refinance.
Fixed rate mortgage loans made up 99% of our single-family book as of the end of last year. Fixed rate loans protect mortgage borrowers against interest rate shocks on their mortgage payments.
Our single-family serious delinquency rate remained near historically low levels at 55 basis points as of December 31 compared to 65 basis points as of the end of 2022. In addition to market actors, this is a testament to the enhanced underwriting policies, loan workout options and support we give to lenders and borrowers.
Turning to our credit risk transfer program. In 2023, we executed 17 single-family credit risk transfer transactions between our Connecticut Avenue Securities and credit insurance risk transfer programs, transferring a portion of the credit risk on approximately $308 billion of unpaid principal balance at the time of the transactions. We paid $1.4 billion in annual premiums in 2023 on our outstanding single-family credit risk transfer transactions.
Now in multifamily. We reported $2.6 billion in net income in 2023, an increase of $400 million compared to 2022. This was primarily due to a decrease in the provision for credit losses year-over-year. In 2022, we recorded a $1.2 billion provision for multifamily credit losses, mostly driven by our seniors housing loans. In 2023, we recorded a $495 million provision for multifamily credit losses due primarily to changes in loan activity and declining property values on our overall multifamily book.
Our seniors housing loans did not drive our multifamily provision for credit losses in 2023 because of loss mitigation activities we performed last year and some recovery in property financials. However, our allowance for seniors housing loans remained elevated.
Turning to our acquisitions. We acquired $53 billion in multifamily loans last year, down 24% from 2022. Continued market uncertainty and high interest rates kept total market volumes low. Based on our analysis, we met the mission requirements set forth by FHFA for last year that required that at least 50% of our 2023 multifamily business volume focused on certain affordable and underserved market segments.
The multifamily loans we acquired in 2023 had 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 63% and a weighted average debt service coverage ratio of 2x.
We continue to monitor the impacts of elevated interest rates on our multifamily book. Higher rates may reduce the ability of multifamily borrowers to refinance their loans prior to maturity when they typically have a balloon payment due.
Our near-term maturities remain low. Roughly 2% of our multifamily book is expected to mature in 2024 and approximately 3.5% is expected to mature in 2025. Elevated interest rates 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 December, adjustable rate mortgages made up about 9% of our multifamily book.
Our multifamily serious delinquency rate increased to 46 basis points as of December 31, 2023, from 24 basis points as of the same time the prior year, driven by stress in our seniors housing loans. We actively pursue loss mitigation actions when appropriate, such as loan workouts, which may resolve delinquencies. If appropriate workouts cannot be achieved, the loans are foreclosed upon.
Our multifamily serious delinquency rate as of December 31 is down from the recent peak of 54 basis points as of September 30 because of these loss mitigation actions and foreclosures. We expect these activities will continue into 2024, which may further decrease our multifamily serious delinquency rate.
Our primary form of multifamily risk sharing is our delegated underwriting and servicing or DUS program, which shares risk on the loans we acquire with our network of DUS lenders. In addition to this risk sharing, in 2023, we completed two multifamily credit risk transfer transactions, which transferred a portion of the credit risk on nearly $31 billion of unpaid principal balance at the time of the transactions.
Turning to capital. As of the end of the year, we remain significantly undercapitalized with a $243 billion shortfall to the amount of capital needed to be fully capitalized. This was a $15 billion improvement compared to the $258 billion shortfall at the end of 2022.
Before we close out today, I'll share some thoughts on our macroeconomic outlook for 2024. Our economists have replaced their call for a modest recession with an expectation for positive but below trend growth in 2024. However, heightened uncertainty and significant downside risks, including geopolitical risks remain and in their view, the economy still faces a higher-than-normal risk of recession.
The market expects the Federal Reserve to cut interest rates this year, which we believe will lead to a further pullback in mortgage rates. We currently expect the 30-year fixed rate mortgage rate to average 6.1% in 2024. While affordability challenges, the lock-in effect and a low inventory of homes available for sale will likely persist, single-family home sales are expected to begin a slow recovery. Because of this, we expect single-family mortgage originations to grow from $1.5 trillion in 2023 to nearly $2 trillion in 2024.
Purchases are likely to continue to dominate the market given the rate environment, and we estimate they will make approximately 75% of single-family mortgage originations this year.
In the multifamily market, we expect to continue to see similar trends in 2024 that we saw last year, given elevated interest rates, abundant supply in some markets and muted rent growth, we believe multifamily housing starts will likely decline this year. We expect rent growth to remain below recent averages in the 1% to 1.5% range in 2024 as a result of rising levels of consumer debt, elevated new construction completions and anticipated slowing job growth. Multifamily origination volumes are expected to remain subdued in 2024 at between $295 billion and $325 billion.
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.