May 7, 2016
Executives
Maureen Davenport - Senior Vice President and Chief Communications Officer Timothy Mayopoulos - President and Chief Executive Officer
Analysts
Joe Light - Wall Street Journal Denny Gulino - Market News International John Carney - Wall Street Journal Brian Collins - National Mortgage News
Operator
Thank you for joining Fannie Mae's first 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.
Maureen Davenport
Thank you and good morning everyone. Before we get started I just wanted to thank you for joining the media call and the webcast for the first quarter financial results.
Just a few reminders, please note that this call may include forward-looking statements including statements about the company's performance, business plans, and strategy. Future events may turn out to be very different from these statements.
The Risk Factors and Forward-Looking Statements sections in the company's first quarter 2016 Form 10-Q filed today and its 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.
This call cannot be recorded for broadcast by any participant other than Fannie Mae. Following the remarks of Fannie Mae's President and Chief Executive Officer Tim Mayopoulos, we will open the media conference lines for questions from reporters.
For those of you participating via webcast, your lines will be muted throughout the call. If you are a reporter who 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.
So welcome, again, and I'd like to turn the media conference call over to our President and CEO, Tim Mayopoulos.
Timothy Mayopoulos
Thanks, Maureen, and good morning everyone. Thanks for joining us today as we share our financial results for the first quarter of 2016.
We had another quarter of positive financial performance. We continued driving improvements to both our company and the housing finance system.
We are delivering better service and innovative tools to our customers. We're working with partners to increase certainty and tackle important housing challenges, such as affordability and access to credit for qualified borrowers.
And we're making our business model stronger to reduce risk for taxpayers. Improvements we've made to the company have put us in a stronger position to fulfill our responsibility to deliver safe, affordable mortgage financing for customers in all markets at all times.
I'm pleased with our progress. The underlying fundamentals of our business including revenues, administrative expenses, and the credit quality of our book remain strong.
Because of these strong fundamentals we expect to remain profitable on an annual basis for the foreseeable future. Nonetheless there are factors that we do not control, such as changes in interest rates and home prices.
These factors can result in significant volatility in our financial results and can have a positive or negative effect on our results in any given quarter. We saw some of that volatility this quarter as we experienced fair value losses on the derivatives that we used to manage risk from interest rate changes.
Let me summarize the primary drivers of our first quarter results and then provide an update on specific areas of progress. For the first quarter of 2016, we reported net income of $1.1 billion and comprehensive income of $936 million.
This was our 17th consecutive quarter of profitability. Net and comprehensive income were down from the $2.5 billion in net income and the $2.3 billion in comprehensive income that we reported in the fourth quarter of 2015.
As I mentioned earlier, the decrease in net income in the first quarter was due primarily to the fair value losses on the derivatives that we use to manage risk from interest rate changes. These fair value losses were partially offset by credit-related income that we received in the first quarter.
Based on our positive first quarter results, we expect to pay Treasury $919 million in dividends by the end of June. This will bring total cash dividends paid to Treasury to $148.5 billion compared with the $116.1 billion that we received in support.
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 draw from Treasury. I also want to highlight our progress in improving the company and making our housing finance system more sustainable.
From the start of 2009, we have financed more than 5 million home purchases, 14 million refinancings and 3 million rental apartment units. We have done this with substantially improved underwriting standards, which we began implementing in 2008.
The post-crisis book of business is strong and performing well. Approximately 85% of our single-family loans are 15- and 30-year fixed rate loans, the kind that we help make possible.
These mortgages remain the mortgage of choice for the vast majority of American homebuyers because they provide certainty, predictability, and the ability to refinance at any time. We have also improved our business model in several important respects.
First we have substantially changed the primary source of our revenues. Ten years ago, the primary driver of our revenues was our retained investment portfolio, mortgage securities and other income producing mortgage assets that we bought.
Before the crisis, some pointed to the size of our portfolio as a source of risk. Today, we have wound down the portfolio related to investment activities from a historic high of $900 billion to less than $200 billion, with further reductions underway.
At the same time, we have increased our guarantee fee revenues, the fees that we collect on each mortgage that we guarantee against credit loss and put into our mortgage-backed securities. These fees are a much more reliable and stable source of revenue and much less subject to interest rate and market volatility.
In a second major improvement to our business model, we have become much more aggressive in laying off credit risk to private capital. We are moving from being a company that stores credit risk to being one that also manages credit risk by intelligently distributing it to other market participants.
We do this through capital market transactions, reinsurance transactions and other types of transactions. This is a brand new market that did not exist two years ago, and our structures and strategies have been critical to creating it.
Investors are attracted to these transactions because they understand that we have developed world-class capabilities to assess credit risk, manage loan servicers, and minimize losses. Finally, I would call out a third major improvement to our business model moving toward increased certainty for our lenders through a real-time verification of the key components of credit quality in the loans that we acquire.
We are continuing to develop the technology to allow lenders to check loan data by using various sources before the loan is even closed, let alone delivered to us by the lender. Our goal is to help lenders verify information about borrower income, borrower assets, and the value of the collateral and increase lender certainty that when they sell a loan to us, it stays sold.
In summary, we are a stronger company than we were just a few years ago. The improvements we have made to Fannie Mae have made us better prepared to fulfill our housing mission and support our customers in good times and in bad.
We will continue to execute on behalf of our partners. We will continue to drive further improvements to the housing finance system and our company.
And we will continue to serve those who house America. I appreciate your time and I'm happy to open it up for your questions.
Operator
[Operator Instructions] Our first question comes from Joe Light.
Joe Light
So you gave a speech a couple weeks ago in which you touched on Fannie's lack of capital. And you said something to the effect of you do know that you don't have enough capital today.
So do you think it's prudent for -- I know it's not up to you guys, but prudent for you guys to start saving capital, while Congress and the administration figures out what to do with your future? And if you were allowed to retain capital what -- I guess is there anything you would change about the way you run the business?
Timothy Mayopoulos
As I'm sure you've seen there has been renewed interest in this topic. As I've commented in the past, we do have declining capital and it will go to zero in 2018.
Director Watt also commented on this issue in his speech to the Bipartisan Policy Center earlier this year and noting that there is risk to having a small and declining capital buffer. At some point it seems to us that policymakers will have to address this question of capital in the housing finance system, so that taxpayers will not be immediately on the hook for potential losses.
And it's clear to us that operating with essentially zero capital is not sustainable. Whether that issue will get addressed and exactly how it will get addressed is not an issue, as you point out, for us, but really a question for FHFA and other policymakers, and we'll just stay tuned and see what happens in that regard.
Operator
Our next question comes from Denny Gulino with Market News International.
Denny Gulino
Let me just follow-up on that. It's unsustainable and Congress has shown no capability to move ahead with reform.
So as a manager you have to somehow manage to zero capital. So how do you do that?
Timothy Mayopoulos
We try to run our business as prudently as possible. I've described in my earlier comments some of the things that we have done to try to do that and to run this business as effectively as we can.
We do, of course, have access to a line of credit from Treasury in the event that we have losses. So that continues to be available and that's certainly critical to our continued operation.
But it does seem to us that in the long term that that's not a very sustainable model. But we have tried to do as much as we can within our control to manage the factors that could impact these issues.
We've tried to keep credit standards high so as to minimize losses. We've been aggressive in addressing loss mitigation when we do have loans that go delinquent.
And we've been looking to try to transfer as much of the risk as reasonably possible although there is not always a timing match between when losses might be incurred and when the benefit of risk transfer transactions is achieved. So this is a complex and difficult issue.
I appreciate your question. But all I can say is that we're doing the very best that we can with the factors that we can control.
And we need policymakers to act on the matters that are within their control.
Operator
Our next question comes from John Carney of the Wall Street Journal.
John Carney
I had a perhaps hypothetical question. But if the Treasury were to go back to a 10% dividend, I know you guys have been profitable, but lately profits have fallen short of what would've been necessary to pay at, 10% on the entire amount drawn.
You foresee sustained profitability. But do you think the profit should be enough to pay a 10% percent dividend if you went back to that?
Timothy Mayopoulos
I don't know that whether we would be profitable enough to do that or not. I think one of the things that we've clearly seen in the last few quarters is that there's been a lot of volatility to our profitability.
That can work to our favor and can work to our detriment. In a rising interest rate environment we might see an increase to our profitability.
Obviously, when interest rates decline from the beginning of a quarter to the end of the quarter it tends to have a negative impact. So I think that it would be difficult to estimate whether in any given quarter we would have sufficient profits to pay a 10% dividend on the total amount drawn from the Treasury.
But one thing I'm pretty sure of is that if we do have that volatility we'll se, there probably will be some quarters where we could not do that.
Operator
And our next question comes from Brian Collins with National Mortgage News.
Brian Collins
Changing over to like regulatory stuff, have you made any progress recently in trying to update your FICO scoring models or moving to some other trended data or any newer credit scoring models?
Timothy Mayopoulos
So we have continued to work internally and with FHFA on examining various credit scoring issues. I would emphasize that we use our own internal, proprietary credit scoring methods.
People sometimes suggest that' we slavishly follow FICO. That's not true.
We actually evaluate the credit data through our own automated system, Desktop Underwriter, which is the leading automated system in the industry and form our own judgments about -- through that process form our own judgments about the creditworthiness of borrowers. We do express our characteristics about our loan book and other activities in terms of FICO because it's a commonly understood language that people in the industry and investors understand.
But we use our own proprietary systems as we make loan-by-loan decisions about whether a loan or a borrower is one that we think is appropriate. We've also, of course, been working on becoming even more sophisticated in that by using trended credit data, which is something that we will make available to lenders later this year.
And I think that's an important step forward because it will allow lenders and us to make credit decisions based on a more refined view of borrower activity. For example if, a borrower is one that pays off all of his or her credit balances every month as opposed to revolving that credit, that's obviously a stronger borrower and demonstrates an ability to make those payments and a willingness to make those payments every month.
So with that kind of improved insight into borrower behavior I think that we are moving forward. But we continue to look at the question of, other kinds of credit scoring models as well.
Operator
We have no other questions coming through at this time. I'd now like to turn the meeting back over to our host.
End of Q&A
Timothy Mayopoulos
Well, thank you very much. We appreciate all your questions and hope you have a great day.
Thanks a lot.
Operator
That concludes today's conference. Thank you for participating.
You may now disconnect.