May 3, 2018
Executives
Maureen Davenport – Senior Vice President and Chief Communications Officer Tim Mayopoulos – President and Chief Executive Officer David Benson – Chief Financial Officer
Analysts
Joe Light – Bloomberg News Bonnie Sinnock – National Mortgage News Richard Leong – Reuters
Operator
Welcome and thank you for standing by. At this time all participants are in a listen-only mode until the question-and-answer session.
[Operator Instructions] Today's conference is being recorded, if you have any objections you may disconnect at this time. I will now turn it over to your host, Maureen Davenport, Fannie Mae's Senior Vice President and Chief Communications Officer.
Thank you. You may begin.
Maureen Davenport
Thank you, Operator. And thank you all for joining today's media call and webcast to discuss Fannie Mae's First Quarter 2018 Financial Results.
Please note that this call may include forward-looking statements, including statements about the company's future performance and actions, 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 2018 Form 10-Q filed today and its 2017 Form 10-K filed February 14, 2018 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.
We ask that you do not record this call for public broadcast and that you do not publish any full transcript thereof. I'd now like to turn the call over to Fannie Mae's President and CEO, Tim Mayopoulos; and Fannie Mae's Chief Financial Officer, David Benson.
Tim Mayopoulos
Good morning everybody. Thanks for joining us this morning to discuss Fannie Mae's first quarter results.
Our results reflect another strong quarter for our business. They are driven our ongoing actions to make Fannie Mae and housing finance stronger and better prepared to meet the challenges of the future.
We reported pre-tax income of $5.4 billion for the first quarter compared to $5 billion for the fourth quarter of 2017, reflecting the strength of our new line business. In addition, we reported $4.3 billion in net income and $3.9 billion in comprehensive income for the quarter.
These compare with a net loss of $6.5 billion and comprehensive loss of $6.7 billion for the fourth quarter of 2017. The primary driver in the shift in net income was the one-time negative impact to our fourth quarter results from the Tax Act.
As we had said last quarter, that was a one-time event resulting in a reduction of the corporate tax rate. Starting this quarter and going forward, we will benefit from this lower rate.
The benefit in the first quarter was approximately $700 million. We also had $1 billion in net fair value gains this quarter, primarily due to interest rate increases.
Looking ahead, we expect to remain profitable on an annual basis for the foreseeable future. However, as we had discussed in the past, factors such as interest rates and home prices are beyond our control, and fluctuations in these factors make our quarterly results potentially volatile.
We expect to pay $938 million dividend to treasury in June, 2018. And based on our strong first quarter results, we will retain $3 billion in capital that should help us weather modest volatility in our results.
Beyond these top line numbers, let me review a few highlights from the quarter. Overall, our quarterly results reflect another solid performance by our single-family and multi-family businesses.
We provided approximately $113 billion in liquidity to the single-family mortgage market in the first quarter of 2018. And we were the largest issuer of single-family mortgage-related securities in the secondary market in the first quarter of 2018.
We also continue to transfer a portion of the credit risk on single-family mortgages. Over the past several years, we have built a robust, liquid, credit risk transfer program, and our program continues to mature.
In the first quarter, we transferred a portion of the risk on a $100 billion of mortgages measured in unpaid principle balance at the time of the transaction. The serious delinquency rate of our single-family book was 1.16% at the end of March.
Last year's hurricanes are the primary reason our single-family SDQ rate remains higher compared to pre-storm levels. We expect this will continue to be the case for several more months.
And after that, we expect our SDQ rate [technical difficulty] its previous downward trend. In our multi-family business, we provided more than $11 billion in financing during the first quarter.
Our multi-family book continues to grow. Our credit experience in the book has been consistently high quality, and lenders' share of the risk gone close to 100% of our loans.
Through our multi-family business we continue to be a leader in supporting both affordable and workforce housing. Our financing supported 154,000 units of multi-family housing in the first quarter.
More than 90% of these were affordable to families earning at or below 120% of the area median income. Detained information regarding the drivers of our third quarter results can be found in our press release and quarterly report on Form 10-Q which we filed today.
Before taking your questions, let me underscore that our first quarter results flow from a business strategy that we will continue to pursue throughout 2018. The centerpiece of that strategy is our customers.
This year we will continue our drive to provide great service to our customers, and to deliver innovative solutions for their most important challenges. With each passing quarter, we are delivering new technologies that are making mortgage lending more simple, certain, and efficient.
In April, for example, we launched a new search tool for our single-family customers. It uses natural language processing and artificial intelligence to make it easier for them to search our selling and servicing policies.
It gets smarter the more questions customers ask. And so far, we're getting great feedback from them.
In multi-family, we are testing ways to let our delegated underwriting and servicing lenders directly integrate their data into our DUS Gateway system using application programming interfaces or APIs. We're brining that same innovative approach to areas such as green financing which helps preserve and upgrade affordable rental properties to make them more energy and water efficient.
Properties that participate in our green financing program are projected to save enough energy to power 80 million cell phones for a year, and enough water every year to fill 42 billion glasses. Our green financing business started small, but in the last two years has become a fairly sizable part of our multi-family business.
It has grown for about $400 million at the end of 2015, to more than $31 billion by the end of 2017. In fact, in March, we were recognized by the Climate Bonds Initiative as the largest issuer of green bonds in the world.
And in April, we received our fourth consecutive ENERGY STAR Partner of the Year award from the Environmental Protection Agency. All these solutions build on steps we have already taken, and steps we will take next quarter and the quarter after.
Taken together, our innovative solutions are transforming what it is like to be a Fannie Mae customer. In time, we believe that they will transform mortgage lending.
That's why we are working with customers and fintech companies to test new technologies learn what works and what doesn't. Fannie Mae's position provides us the opportunity to scale new solutions, and to speed their adoption across the industry.
As this evolution continues it will deliver important benefits to industry stakeholders. They'll help drive time and inefficiency out of the mortgage process.
It will enable our customers to pass these benefits on and create more opportunities for home buyers and renters. And more broadly, we will be making the system stronger, safer, and more sustainable.
So with today's filing we're happy to report that our business is off to a strong start in 2018, and that our aspirations for housing are high. Thank you for joining the call today.
With that, I'll be glad to answer any questions you might have.
Operator
Thank you. [Operator Instructions] We have our first question from Joe Light, Bloomberg News.
Your line is open.
Joe Light
Hi. Thanks for taking the question.
I was wondering if you could talk a little bit about I guess the decision last year to raise the maximum debt-to-income ratio, so 50%. And then whether anything unexpected happened next, and kind of why you put in place some additional requirements to walk it back?
Tim Mayopoulos
Sure. Good morning, Joe.
Good to hear from you. Yes, last year we did adjust our debt-to-income ratio limit.
What we did was we moved -- we had previously been making TTI loans up to 45%. We moved to 50% provided that there were compensating factors in place to support that.
The key for us is to make sure that we don't have a layering of risk that we think is inappropriate. TTI is of course one measure of loan quality, but it's not the only measure.
And we recognized that it was possible to make good sustainable loans with TTIs in excess of 45% provided that there were other compensating factors. So we put that in place and we had certain expectations as to what the results would be.
The initial results were a bit higher in terms of the number of loans that we were getting in that category. And as a result, we took some steps to focus in on what the risk factors, and made some adjustments to our automated underwriting system to come back in line with what we expected.
So from our point of view this is exactly the cycle we would expect, that we'd make some adjustments. We look at the data.
And if the data is not consistent with what we would expect we make further adjustments and apply prudent risk management techniques.
Joe Light
Good. So were some of the loans that you took on in that kind of intervening time period from your perspective, did they have more risk than you wanted to take on.
Or I guess why is volume on its own a bad thing?
Tim Mayopoulos
Volume on its own is not a bad thing. But we had certain expectations about what we expected to see.
And so when you see something that's greater than what you anticipate you want to go back and take a close look at it to make sure that you understand what exactly is happening.
Joe Light
Is it some of those loans too risky?
Tim Mayopoulos
I wouldn't say that they were risky. I mean the loans that we've acquired so far have performed well.
But we are operating in a pretty favorable environment. And we want to make sure that we have the right measures in place.
I mean, at the end of the day, as you know, we worked hard to create sustainable credit standards. We have been sticking to those credit standards for the past decade.
And we wanted to make sure that we weren't doing anything that would change that. So I wouldn't say that they were unduly risky, we just wanted to make sure that we were monitoring them appropriately.
And that's what we've been doing.
Joe Light
Okay. Thank you.
Operator
Thank you. [Operator Instructions] Our next question is from Bonnie Sinnock with National Mortgage News.
Your line is open.
Bonnie Sinnock
Hi, thanks for taking my question. I was interested, you mentioned it sounded like in the single-family if was correct in hearing it correctly, there is some use of some natural language processing and AI for the lender seller/servicers to search the guides for selling and servicing policies.
So to me that sounded like almost Alexa find me the servicing policy. Is that the kind of thing you're talking about; is there audio commands involved in that?
Tim Mayopoulos
They're not audio commands. People can type in search queries.
But it makes a lot more like using Google, for example, as opposed to having to know the guide well enough to know what the key search terms are. So someone who is less knowledgeable or less experienced with our selling and servicing guides can use these new search techniques and get to the right answers more quickly.
And as I mentioned, the technology actually becomes more sophisticated and more refined the more queries it gets. And so one of the things it does is that it helps us identify those areas where there might be questions or confusion or uncertainty on the parts of our seller-servicers, and allows us to focus in on clarifying those things, and clarifying our policies as we go forward.
Bonnie Sinnock
So it sounds like it actually provides some feedback to you as to what folks are searching for, and you kind of know that those are areas where people are looking for similar clarification?
Tim Mayopoulos
Exactly. It allows us to track what the areas of inquiry are in a way that's much more robust than for example calls coming into a call center.
And it allows us to, in a very data-driven way, focus in on those areas where there seems to be a lot of focus, so which of course can lead us to places where we can provide further clarifications to the policies.
Bonnie Sinnock
Okay, thank you.
Tim Mayopoulos
Thank you.
Operator
Stand by for our next question. Thank you, our next question is from Richard Leong from Reuters.
Your line is open.
Richard Leong
Hi, good morning.
Tim Mayopoulos
Good morning, Richard.
Richard Leong
Hi, I would like to ask you about what is your general view about what is happening in the multi-family sector and just going forward. And also my second question is regarding about the quarter's derivative gains and I was just wondering if you expect further increases on gains from this particular area probably with interest rates continuing to go higher given the FX outlook?
Tim Mayopoulos
Okay. Well, I'll ask Dave Benson to take up your question on gains, but is there something about the multi-family market in particular you'd like us to address?
Richard Leong
I think, specifically just in terms of commitment and your share of business going forward, if you could provide any guidance in that?
Tim Mayopoulos
Okay. So on the multi-family front, our business has continued to grow and we've been pleased with the progress we've been making there.
Of course we do operate in the multi-family markets compared to a total volume cap with certain kinds of business that FHFA has imposed on us and on Freddie and of course we abide by that. There are certain categories that are exempt from the cap that are primarily focused on areas where FHFA wants to make sure there is as much capital provided as possible, and those have been areas that we've been focused on.
I would say, our overall approach to the market has not changed significantly, and that our primary area of focus is really around workforce and affordable housing. As I mentioned earlier, 90% of what we finance is affordable to families at a below 120% of area median income, which in many communities is a pretty modest level of income.
So we're really focused in on certain people like teachers and nurses and firefighters and truck drivers and folks like that. And I would say that the thing that concerns us the most about the market whether it's multi-family or single-family is really a question of affordability.
Obviously, the housing markets have been pretty strong on both the single-family and multi-family side with home price appreciation over the last five or six years in single-family and with rent increases -- very significant rent increases over the last decade or so in the multi-family space. So, those rent increases are going up faster than wage growth.
And that's putting a lot of pressure on a lot of people with modest means. So our real area of focus in the multi-family business is trying to grow the amount of workforce in affordable housing that we're doing, but overall we feel good about the fundamentals of the market.
And obviously, they vary a little bit from geographic sector to geographic sector. But overall, we feel good about the market and we're really focused on that workforce in the affordable housing space.
So with that, I'm going to turn it over to Dave to talk about your fair value gain question.
David Benson
Sure. So I believe your question is about the movement of interest rates, its impact on fair value and whether we would expect to have further gains based upon our view of interest rates.
The first thing is that we don't actually make a bet, so to speak, on interest rates. We're hedged economically to interest rates.
So either way whether rates go up or down from an economic basis, we're actually flat to that risk. The accounting for our various instruments differ so that both the derivatives that we have as well as some other items are mark-to-market through the income statement, whereas other portions of the balance sheet such as our debt and much of our assets are not, due to the accounting rules.
And so what you have a tendency to see is just that the movements quarter to quarter are pronounced even though from an economic standpoint we're very matched. So if interest rates continue to go up, certainly in the way that they did I the last quarter, we would expect for there to be further fair value gains of that type.
On the flip side, if rates were to go down, we would expect to have fair value losses that would come through based upon those positions. This is something that we've had that's been a part of our profile for quite some time.
I will say that that exposure is actually quite a bit less than it was going back a couple of years as many of the positions have come off the buck. But the answer is that we don't have a view on whether rates are going to go up or down, it's -- we actually are from an economic basis hedging the book to be flat.
Richard Leong
Thanks.
Operator
Thank you. At this time, I see no further questions in queue.
I will now turn it back over to Fannie Mae's President and CEO Timothy Mayopoulos, thank you, for closing remarks. Go ahead, please.
Tim Mayopoulos
Thank you very much, Operator and thank you all for your questions. We'll look forward to talking with you in another quarter.
Take care, thanks a lot.
Operator
Thank you for your participation. That does conclude today's conference.
You may disconnect at this time.