May 1, 2019
Operator
Ladies and gentlemen, welcome and thank you for joining Fannie Mae’s First Quarter Financial Results Media Call. Please note that all connections are presently muted and questions will be taken from the media following the formal presentation.
And I will now turn the call over to your host, Pete Bakel, Fannie Mae’s Director of External Communications. Please go ahead.
Pete Bakel
Good morning and thank you all for joining today’s media call to discuss Fannie Mae’s first quarter 2019 financial results. Please note that this call may include forward-looking statements, including statements about the company’s future financial results, financial condition, business plans and strategies, capital requirements, economic and healthy market forecasts, market share and dividend payments.
Future events may turn out to be very different from these statements. The risk factors and forward-looking statements sections of the company’s first quarter 2019 Form 10-Q filed today and its 2018 Form 10-K filed February 14, 2019 describe factors that may lead to different results.
As a reminder, this call is being recorded by Fannie Mae and the recording maybe 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 We ask that you do not record this call for public broadcast and that you do not publish any full transcript.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 would now like to turn the call over to Fannie Mae Chief Executive Officer, Hugh R. Frater; and Chief Financial Officer, Celeste Mellet Brown.
Hugh Frater
Good morning. Thanks, Steve and thanks for joining us to discuss Fannie Mae’s results for the first quarter of 2019.
I am joined today by our Chief Financial Officer, Celeste Brown. In a moment, Celeste will highlight our first quarter financial results and our economic outlook and then briefly touch on a few items that Fannie Mae is focused on right now.
After that, we will be glad to address any questions you may have. Fannie Mae’s financial results for the quarter continued to demonstrate the strength of our business model, our risk management capabilities and our customer focus.
Business volume in the growth of our book and our credit performance were all solid in the first quarter. Fannie Mae’s credit risk management programs continued to grow as we become more adept at attracting private capital into the mortgage markets and our customers continue to respond positively to technology innovations to help make the mortgage market most certain, efficient and safe.
These innovations are part of our 2019 priorities to drive digital transformation in the mortgage market. We are also moving forward on our other 29 team priorities.
We are leaning forward to address the affordable housing supply challenge. We are working to develop a robust secondary market from manufactured housing loans so that this financing is more accessible for lenders and borrowers.
We are working with innovators across the housing industry to find new and less expensive ways to build, maintain and finance homes for buyers and renters. Fannie Mae remains a leading source of financing for workforce rental housing with more than 85% of the multifamily units we financed during the first quarter of 2019 affordable to families earnings at or below 120% of area median income.
And 2 weeks ago, our multifamily Green Financing work earned us a third ENERGY STAR Partner of the Year Award for Sustained Excellence from the Environmental Protection Agency ensuring a smooth transition in June for the uniform mortgage backed security is another important priority for Fannie Mae and this work is on track. We are working with Freddie Mac, FHSA, our customers, investors into many other market stakeholders that this process is smooth, orderly and transparent.
Over trading of the new single security has been underway since mid March and as the spanned upon in a moment, Fannie Mae is increasing its focus on capital in 2019 with the lengths of the proposed capital framework under consideration by FHFA. As I said last quarter, we believe that a robust and sensible capital regime for the GSEs is necessary both for taxpayers and future housing downturns and to sustainably attract private capital to the housing finance systems.
Finally, Fannie Mae welcomes our new regulators, Federal Housing Finance Agency Director, Mark Calabria. We congratulate the Director on his confirmation and we look forward to working closely with him.
Director Calabria has stated that he wants to work for the treasury and others to create a path out of conservatorship. As we have said, since our conservatorship began, we are committed to being as helpful as possible to the director and the FHFA as they and other policymakers consider the future of the year.
I want to close my remarks with one note of appreciation to both the FHFA and to the extraordinary employees at Fannie Mae, which is my first call as the non interim CEO of Fannie Mae and I want to express what I am honor it as to be a part of this great organization. I am excited about the opportunities ahead for housing.
I am inspired by the people who work here and what they do everyday to help American families. I look forward to contributing to Fannie Mae’s success for the years to come.
With that, let me turn it over to Celeste.
Celeste Mellet Brown
Thanks, Hugh and good morning everyone. First, I am going to review the financial highlights for the quarter.
I will then turn to our outlook and finally touch on a number of things that impact our business, this solid financial performance in the first quarter of 2019 earning net income and comprehensive income of $2.4 billion. Based on these results, we expect to pay a dividend of $2.4 billion to treasury by the end of June.
That will leave us with a net worth of $3 billion which is the maximum capital buffer permitted under our agreement with the treasury. Consolidated Fannie Mae’s profitability for the first quarter declined versus the fourth quarter.
This decline was driven primarily by lower credit related income, an increase in fair value losses and lower net interest income during the quarter. Credit relate income in the first quarter fell primarily due to lower volume on re-designations of loans from held for investment to held for sales and a smaller improvement in actual and forecasted home prices.
This was partially offset by a larger benefit from the lower projected future interest rates compared with the fourth quarter. Selling re-performing and non-performing loans is an important part of our portfolio strategy and the sales will vary from period-to-period based on a number of factors including the size of the available population and market appetite.
While the re-designation of certain loans from held for investment to held for sale has been a significant driver of credit related income in recent periods, we may see a reduced impact on this activity in the future to the extent the population of loans we are considering for re-designation decline. While in both quarters we have recognized fair value losses on the risk management and mortgage commitment derivatives due to declining interest rates, fair value losses were higher in the first quarter resulting from a tightening of CAS spreads as well as losses on debt of consolidated trust held at fair value due to larger price increases compared to the fourth quarter.
The decrease in net interest income was due primarily to lower amortization income from our guaranty book of business driven by lower mortgage pre-payment activities due to higher prevailing interest rate environment at the end of 2018 and a decrease in interest income from our portfolios due to lower average balances. Turning to our single-family business our net income declined by $825 million in the first quarter versus the fourth quarter driven largely by the same factors that drove our overall results.
The average single family conventional book of business remained relatively flat from the fourth quarter to the first quarter and increased by 13 basis points year-over-year. Average charge guaranty fees on our new single-family acquisitions net of TCCI fees increased by almost 2 basis points to 50.4 basis points in the first quarter from 48.5 basis points in the fourth quarter and were 8 basis points higher than Q1 of 2018.
The average charge guaranty fee net of TCCI fees on the single-family conventional book guaranty book overall increased to 43.3 basis points in the first quarter, up slightly versus the fourth quarter. Our market share of single-family mortgage loans securitized by the GSE was 56% in the first quarter compared to 57% in the fourth quarter within our historical range.
Our market share has and will continue to fluctuate depending on many factors including product mix, market dynamics, our mission requirements and returns on capital. We actively adjust our strategy to address these factors and achieve the appropriate risk adjusted returns.
The single-family delinquency rate was 74 basis points at the end of the first quarter, down 2 basis points in the prior quarter and 42 basis points year-over-year as our Q1 2018 SDQ rate was elevated due to the impact of the 2017 hurricane. Turning to multifamily, net income remained very consistent with that of the fourth quarter.
We continued to grow our book, which was up 3% in the quarter and more than 10% year-over-year driving an increase in guaranty fee income. The level of charge fees on multi-family acquisitions remained generally consistent with the second half of 2018 as competitive market pressure has persisted but not worsened.
The multi-family book remained strong from a credit perspective as the SDQ rate was 7 basis points at the end of quarter while the rate of substandard loans as a percentage of the book remained relatively flat. For multifamily, our market share of GSE mortgage originations was 56% in the first quarter compared with 41% in the fourth quarter.
As in the single family space, we expect to see period-to-period fluctuations due to the same drivers, product mix, market dynamics, our mission requirements and our returns on capital. We continue to focus on our multifamily credit risk transfer strategy to efficiently manage our capital in return and we issued our first multifamily SERC deal of 2019 in March, which transferred a portion of the credit risk on an $11.7 billion reference for our multifamily loans.
As of the end of the first quarter, we have covered approximately 15% of the multifamily guarantee book to SERC transaction. While we continue to cover nearly all multifamily acquisitions with us, the lender risk sharing program that has proven itself through economic cycles and enables us to share approximately one-third of the credit risk in our multi-family loans with our lenders.
Turning to our economic outlook, we continue to project that economic growth will slow this year with GDP growth projected to cause 2.2% since 2019 from 30% in 2018. We believe the boost from fiscal stimulus which pushed rapid economic expansion in 2018 will fade over this year.
We expect business investment in consumer spending to slow, but we also expect residential fixed investment will rebound in 2019 following a decline in 2018. Our proprietary home purchase sentiment index or HPSI, jumped 5.5 points in March to reach its highest level since June of 2018 buoyed by a brighter housing outlook as consumers appear to have regained some confidence in the housing market.
The index shows the perceptions of both home buying and home selling conditions are returning to prior trends and the uptick in the HPSI is further supported by more consumers expecting interest rates to fall in next 12 months. We expect 2019 home price growth to be approximately 4%, down from roughly 5% in 2018.
We believe home sales will stabilize this year around those 2018 levels amid flowing home price appreciation and lower mortgage rates. Absent a shock, we believe home price movement will be more limited this year as its constrained at the lower end by supply pressure and at the upper end by affordability challenges, whereas interest rates increased through most of 2018, the decline in the first quarter of 2019, the 30-year fixed mortgage rate at the end of March was 49 basis points lower than at the end of December.
We believe that mortgage rates have likely found an equilibrium and it will now stabilize around 4.1% to 4.2% this year. Our forecast reflects our expectation of the one Fed rate increase in December.
We expect total single-family mortgage originations in 2019 to be slightly above 2018 models. Given the recent decline in mortgage rates, we now forecast slight year-over-year gains in refinancing activity for each of the remaining quarters of this year.
Our outlook for the multifamily sector is that rent growth will be positive this year, but slightly lower than in 2018 at 2% to 2.5%. I wanted to give you an update on a few items that are top of mind for Fannie Mae right now.
First, as Hugh noted, we are preparing for UMBS Go-live in June. We have put a lot of resources into ensuring that we are ready, including performing necessary testing to make sure that the platform is ready and working with the industry to ensure that it is prepared for UMBS.
Forward trading of UMBS has been going smoothly. Since the start of trading on March 12 through April 25, $755 billion of UMBS has been traded in the TBA market.
At Fannie Mae, we are forward trading UMBS for both June and July settlement dates. The next milestone is June 30 Go-live data at which point, the enterprises will have the ability to issue the new MBS and Supers, including co-mingled re-securitizations through the platform and common securitization solutions, or CFS will be acting as Fannie Mae’s and Freddie Mac’s agents for issuance, bond administration and disclosures for all newly issued UMBS and Supers.
We are prepared to compete and will continue to focus on generating appropriate risk adjusted returns. Second, I would like to touch on the current expected credit loss standard or CECL.
CECL is a new standard issued by FAS B, which we are required to implement by January 1, 2020. Upon implementation, we expect to recognize a cumulative adjustment to our retained earnings, which could have a significant financial impact and possibly result in a draw from treasury in the first quarter of 2020 depending on many factors, including our first quarter 2020 earnings, the composition of our book and economic conditions and forecast at the time.
Under CECL, we remain [indiscernible] for the lifetime expected credit loss of entire book of loans. Therefore, once implemented, CECL will likely introduce more volatility to our financial results due to its pro-cyclicality.
During times of economic stress our allowance for losses will build faster than under the current accounting standard, but our earnings should also recover faster as conditions improve. We are valuating selling additional risk via our various credit risk transfer programs that may enable us not only to reduce earnings volatility associated with CECL, but also to optimize returns and capital levels in normal and stress scenarios.
On the single-family side, we are exploring options to increase the risk sold, including reviewing attachment levels and term structures. On the multifamily side, we are evaluating new forms of credit risk transfer, including potentially issuing multifamily securities similar to our single-family CAS securities.
We have also begun work on developing our accounting capabilities as it is the way to reduce earnings volatility more broadly particularly as it relates to fair value and interest rate momentum. Finally, I will turn to our continued focus on managing capital.
While we are currently not permitted to retain more than $3 billion in capital, we continually evaluate pricing and other aspects of the business to align with the FHFA’s proposed capital rule. In the first quarter our capital requirement under the proposed capital rule declined by 2% from $89 billion at the end of 2018 to approximately $87 billion.
The decline in capital is primarily attributable to an increase in home prices and additional capital relief from credit risk transfers, partially offset by growth of our book of business. We use credit risk transfers to reduce the amount of capital we would be required to hold under FHFA’s proposed rule.
For single-family, we have reduced our capital requirement for credit risk on recently purchased eligible loans by more than 75% through credit risk transfers. Our multi-family business has been transferring a substantial and growing amount of the credit risk on acquisitions through both its highly successful staff’s risk sharing program and back end credit risk transfers.
With that, I will turn it over to the operator and Hugh and I will answer your questions.
Operator
Hugh Frater
Thank you everyone for joining us. We look forward to seeing you again next time.
Thanks a lot.
Operator
And with that, we do want to thank all of our guests for joining us today. That does conclude the call and you may now disconnect.
Thank you.