Adapted from Comments Delivered by Hugh R. Frater, Chief Executive Officer, and Chryssa Halley, Chief Financial Officer, Fannie Mae, Washington, D.C.
Fannie Mae Moderator:
Good day, and welcome to the Fannie Mae Fourth Quarter and Full-Year 2021 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.
Pete Bakel:
Hello, and thank you all for joining today’s conference call to discuss Fannie Mae’s fourth quarter and full-year 2021 financial results.
Please note this call may include forward-looking statements, including statements related to: the company’s business plans and strategies, including those relating to its mission and capital, and the impact of those plans and strategies; economic and housing market conditions; and the company’s business, loan performance, and financial results.
Future events may turn out to be very different from these statements. The “Risk Factors” and “Forward-looking Statements” sections in the company’s 2021 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 We ask that you do not record this call for public broadcast, and that you do not publish any full transcript.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, Hugh R. Frater, and Fannie Mae Chief Financial Officer, Chryssa C. Halley.
Hugh R. Frater:
Welcome, and thank you for joining us to discuss our 2021 financial results. I’ll provide a few opening comments, and then Chryssa Halley, who I’m very pleased joins me for the first time as our Chief Financial Officer, will speak to the results in more depth.
Our 2021 results reflect several important storylines. Some of the key drivers of our earnings were linked to market conditions that were specific to last year and are not likely to last. Other storylines are more fundamental and will shape our work for years to come as we position the company to help address the extraordinary affordability, environmental, and social challenges confronting housing.
First, let me call out a few facts specific to last year.
2021 was a strong year for our business as we continued to be a crucial source of mortgage financing in an economy that demonstrated growth following a decline in 2020. We recognized $22.2 billion in net income, nearly 88% higher than the year prior, and we ended the year with $47.4 billion in net worth. We remain significantly undercapitalized compared to our $4 trillion balance sheet.
We provided $1.4 trillion in liquidity to the single-family and multifamily markets, enabling the purchase of 1.5 million homes. The $451.3 billion of single-family home purchase loans we acquired was the highest dollar volume on record. And I’m pleased to report that nearly 50% of those loans were to first-time homebuyers, also a record for us and squarely aligned with our mission. We also enabled the refinance of 3.3 million loans and funding for approximately 694,000 rental units.
Low interest rates, while higher than in 2020, sustained a tailwind for the economy and drove continued demand for home purchase and refinance mortgages. These low interest rates, coupled with strong housing demand and supply constraints, super charged home price growth.
Last year also saw 19% single-family home price growth, the highest annual growth rate in the history of Fannie Mae’s home price index. And that was on top of 10.4% home price growth in 2020.
The negative flip side to this price appreciation is that more families have been priced out of the market. In our view, too many homeowners and renters faced a market where supply was low, prices were high, and affordable options to buy or rent were scarce. This is making it even harder to close demographic gaps in homeownership and affordability, including gaps related to race or ethnicity. These gaps are closely related to other forms of economic disparity, particularly household wealth gaps between white families and families of color.
This dynamic, unfortunately, represents a fundamental, persistent challenge in the U.S. housing market. And it underscores the importance of Fannie Mae’s ongoing mission “to advance equitable and sustainable access to homeownership and quality affordable rental housing.” We are making this mission our first priority for the foreseeable future, just as we are determined to be a global financial services ESG leader — which we see as a natural alignment with our charter and our mission.
Through the course of 2021, our mission-first focus yielded important results.
In the spring, for example, we launched RefiNow™ to help low-income homeowners take advantage of low interest rates and reduce their monthly house payments. In the summer, we introduced a change to our Desktop Underwriter® system, making it possible to include positive rental payment history into credit assessments, which can help first-time homebuyers, enabling us to “see” borrowers — including many people of color — who, in the past, may not have even applied for a home loan and some of whom end up with lower monthly mortgage payments than what they were successfully paying in rent.
Later in the year, we topped $100 billion of Green Bond issuances. This milestone demonstrates our leadership in supporting the greening of U.S. housing and reducing the sector’s carbon footprint. Then, in December, we issued our first-ever Sustainability Accounting Standards Board Report.
These are just a few examples of how we delivered on our mission in 2021. As we move into 2022, we are adding to this momentum.
Soon, we look forward to publishing our Equitable Housing Finance Plan. The societal and economic benefits of affordable, sustainable homeownership and rental housing are well-accepted. Homeownership, coupled with a self-amortizing mortgage, has long contributed to wealth creation, especially for middle-class families who may not have the opportunity to accumulate assets elsewhere. Unstable, inadequate, or substandard housing is closely related to a host of negative long-term consequences, including health outcomes and educational attainment, that have a broader societal impact. Our Equitable Housing Finance Plan is focused on knocking down barriers faced by underserved homeowners and renters across the U.S., with an initial focus on Black homeowners and renters. Putting this plan into action will be a major focus of Fannie Mae in 2022 and beyond.
One essential element of our work on housing equity is homebuyer education. In early January 2022, we introduced HomeView™. HomeView is a free, online consumer education resource for every step of the homeownership journey. It provides consumers the tools and information to navigate this complex process.
We believe it will create better-informed, successful homeowners — the kind of homeowners who are the bedrock of a safe, sound housing system. Already, more than 16,000 learners have registered on HomeView, and more than 12,000 have completed the first-time homebuyer course, earning a certificate of completion that they can share with their lenders.
In addition to introducing practical solutions for homeowners and renters, Fannie Mae is also sharing important research on housing affordability, equity, and the growing impact of climate change and natural disasters. In recent months, we’ve published papers on closing costs for first-time and low-income homebuyers and on potential appraisal bias in refinance transactions. Our research is aimed at deepening our understanding of barriers to housing affordability and equity — and spurring conversation about ways that we as an industry can knock down those barriers. We will continue to add to this work in the months to come.
We also have a team focused on evidence-based, data-driven climate impacts. Work in this area is a priority for us from a risk-management perspective. We want to partner with stakeholders across the public and private spectrum to address both near and longer-term challenges, particularly those at the nexus of racial equity.
The foundation for all of our mission work is the safety, soundness, and sustainability of our business. Our 2021 results demonstrate that Fannie Mae continues to focus on safety and soundness. As Chryssa will discuss in more detail, Fannie Mae generated strong earnings in 2021. This improves our financial strength, and it adds to the overall safety and soundness of the housing finance system.
Over the past two years, nearly two-thirds of our Single-Family Book of Business has turned over. The quality of our new business is high, but the pricing of that business does not reflect the capital requirements of our regulatory rule.
One of our most important tools for achieving our mission and ensuring safety and soundness is pricing. In January, for example, we announced price increases on loans for second homes and certain high-balance loans. We structured these changes to ensure that they don’t adversely affect low- and moderate-income borrowers.
As we move through 2022, we will closely monitor the market and, if needed, we will adjust our pricing and other business practices as warranted, balancing, as always, our Charter, our mission, and safety and soundness.
2022 will be an important year for housing and for Fannie Mae. We look forward to working closely with FHFA and our housing partners to support the market with a mission-first approach in 2022 and beyond.
Now I’ll turn it over to Chryssa.
Chryssa Halley:
Introductory Remarks and Overall Financial Results
Thank you, Hugh.
I appreciate the opportunity to discuss our 2021 financial results, which, as Hugh mentioned, reflect the strength of our business and also reflect several market-related factors, including a strong economy, exceptional home price growth, and a continued low interest rate environment.
In 2021, GDP grew at a 5.5% pace, compared to a decline of 2.3% in 2020, thanks to the continued momentum of the economic recovery from the impact of the COVID-19 pandemic.
As Hugh mentioned, single-family home prices grew 19.0%. While interest rates increased relative to the previous year, they remained low, with the 30-year fixed-rate mortgage averaging 3.0%. These factors contributed to our recognition of $22.2 billion in net income. As a point of comparison, we recognized $11.8 billion in net income in 2020.
Though we recognized strong net income last year, we remain significantly undercapitalized. As a point of reference, the deficit of our core capital to our statutory minimum capital was $100.3 billion as of the end of the last year. It’s important to note that the enterprise regulatory capital framework requires substantially higher levels of capital than our statutory minimum capital. Further, our efforts to build sufficient capital to meet our requirements can be significantly affected by growth in our Book of Business, which can drive increases in our required capital that offset or even outpace future increases in our available capital. We will begin reporting capital amounts as determined under the enterprise regulatory capital framework in our Q1 2022 results.
Now, turning to the largest contributors of our results in 2021 compared to 2020: credit-related income and net interest income. We recognized $5.1 billion of credit-related income last year, a nearly $6.0 billion improvement compared to the $855 million expense we incurred in 2020. Credit-related income in 2021 was driven primarily by strong actual and forecasted home price growth, an increase in the volume of loan redesignations, and a reduction in the company’s estimate of losses it expects to incur as a result of the COVID-19 pandemic. These results were partially offset by increases in interest rates. Conversely, credit-related expense in 2020 was driven by the impact of COVID-19 and the associated economic downturn, offset by higher actual and forecasted home prices, lower actual and projected mortgage interest rates, and the redesignation of certain reperforming single-family loans from held-for-investment to held-for-sale.
We also recognized $29.6 billion in net interest income in 2021, a $4.7 billion increase compared to the $24.9 billion amount recognized the prior year. This increase was driven by higher base g-fee income and higher amortization income throughout 2021. Our base g-fee income grew thanks to growth in our Conventional Guaranty Book of Business to $3.9 trillion, from $3.6 trillion in 2020, coupled with an increase in our average charged guarantee fee. Single-family refinances of $903.7 billion in 2021 drove significant prepayment activity, resulting in elevated amortization income during the year.
Finally, we saw approximately $155 million in fair value gains in 2021, compared to approximately $2.5 billion in fair value losses the previous year. Fair value gains in 2021 were primarily driven by declines in the fair value of risk management derivatives and trading securities, offset by the impact of hedge accounting. Fair value losses in 2020, before we implemented hedge accounting, were primarily driven by declines in the fair value of commitments to sell mortgage-related securities as prices increased during the commitment period.
It’s important to note that we continue to expect the pace of home price growth to moderate in 2022, and we have already seen a decline in the volume of refinancings in the second half of 2021 as interest rates have risen. These factors are likely to result in lower net revenues and credit provision or lower credit benefit over the next year when compared to 2021. I’ll address some of these trends later in my remarks.
Let me now transition to our Single-Family and Multifamily Business segments.
Single-Family Results
In Single-Family, we reported $19.1 billion in net income and $25.7 billion in net revenues in 2021, impacted by the same factors driving total company results. As a point of comparison, both net income and net revenues increased relative to 2020, when we reported $9.9 billion in net income and $21.9 billion in net revenues.
Single-Family acquisitions of $1.4 trillion in 2021 remained at near-record highs, only slightly lower than 2020’s record volumes. Purchase acquisitions as a percentage of total rose to 33%, compared to 30% in 2020, and we expect to continue to see a shift to a purchase market as rates increase into this year. As Hugh noted, nearly two-thirds of our Single-Family Book of Business has been originated since the beginning of 2020. Given this dynamic and our expectation of fewer refinances in the coming years, we expect our book to turn over more slowly, resulting in lower amortization income in future years than we saw in both 2021 and 2020.
In credit, our serious delinquency, or SDQ, rate continued to decrease to 1.25% as of December 31 last year, down from 1.62% as of September 30, and 2.87% as of December a year ago. The decrease in our SDQ rate was largely a result of the ongoing economic recovery and the decline in the number of single-family loans in COVID-19 forbearance plans, attributable in part to the workout options Fannie Mae offered to borrowers. Approximately 0.7% of our Single-Family Guaranty Book of Business, or approximately 117,000 loans, remained in active forbearance as of December 31 of last year, compared to 3.0% of our book at the end of 2020. We expect the COVID-19 pandemic to result in a continued higher Single-Family SDQ rate over the next several quarters compared with pre-pandemic levels.
Finally, Fannie Mae re-entered the credit risk transfer market in the fourth quarter of last year, entering into five Single-Family CRT transactions during the quarter between our Connecticut Avenue Securities® and Credit Insurance Risk Transfer™ programs. With these transactions, we transferred risk on a portion of approximately $205 billion in UPB at the time we entered the transactions.
Multifamily Results
Shifting to our Multifamily Business, we reported net income of $3.0 billion in 2021, an increase from $1.9 billion in 2020, and net revenues of $4.3 billion in 2021, up from $3.5 billion the prior year.
The year-over-year increase in net income was driven by a shift to credit-related income of $511 million in 2021 from credit-related expenses of $623 million the previous year, resulting from improved economic data and lower expected losses as the recovery from the pandemic continued, and due to strong market fundamentals, including higher estimates of both actual and projected property values.
Net interest income grew to $4.2 billion in 2021, from $3.4 billion in 2020 due to higher guaranty fee income from book growth and higher charged fees, and higher yield maintenance revenues resulting from an increase in prepayments.
We acquired $69.5 billion in multifamily loans in 2021, relative to our $70.0 billion volume cap for the year. In addition to this volume cap, FHFA also required that at least 50% of our 2021 Multifamily Business volume be mission-driven, focused on specified affordable and underserved market segments, and that a minimum of 20% of our Multifamily Business volume in 2021 must be affordable to residents at 60% of Area Median Income or below. Based on our analysis, we met both mission requirements in 2021. FHFA has placed a $78 billion volume cap on our Multifamily Business for 2022, up from a $70 billion cap they assigned for last year. We expect that this cap and related mission-driven requirements will continue to influence our acquisition strategy.
Turning to credit, our Multifamily SDQ rate decreased to 0.42% as of December 31, 2021, compared to 0.98% as of December 31, 2020. This decrease was driven primarily by the ongoing economic recovery resulting in loans that received COVID-19 forbearance completing their repayment plans or otherwise reinstating.
In addition to the Single-Family Credit Risk Transfer transactions brought to market in Q4 of last year, we also executed two Multifamily Credit Insurance Risk Transfer deals, transferring risk on a portion of $19.8 billion in UPB at the time we entered into the transactions.
Outlook
Moving along to our 2022 outlook, our economics team expects the housing market and larger economy to begin to enter a “new normal” in 2022 as the market disruption and policy responses stemming from COVID-19 pandemic subside.
Specifically, in 2022, we expect less fiscal and monetary stimulus. We expect inflation to run above the Fed’s 2% target while unemployment is expected to fall below the lows seen just prior to the pandemic, resulting in the Fed raising rates, a process we expect to begin in March of this year.
We also expect rising mortgage rates will put additional stress on housing affordability for consumers with a continued, though slower, rise in home prices. These factors, along with an expected easing of housing supply constraints, lead us to a 2022 full-year home price growth forecast of 8.2%, compared to the 19.0% we saw in 2021, based on Fannie Mae’s home price index.
We expect GDP growth of 2.8% in 2022, compared to the 5.5% growth seen in 2021.
Risks to our outlook include a lack of easing of supply chain disruptions and related inflation, continued labor market tightness, and the impact of COVID-19 on the U.S. and abroad.
We expect 2022 single-family market originations of $3.2 trillion, relative to $4.5 trillion seen in 2021, driven by a large decline in refinances as fewer borrowers will find refinancings beneficial given the expected higher rates and the fact that many borrowers refinanced in 2020 and 2021.
In multifamily, we’re estimating market originations of approximately $475 billion, relative to the $450 billion expectation for 2021, which was primarily driven by record-level property sales. Although we do not anticipate multifamily property sales to remain as elevated in 2022 as they were last year, we still expect continued strong demand driven by a combination of an improving national economy and pent-up demand, particularly from the 20- to 34-year-old age group, a key demographic for multifamily housing.
Finally, national rent growth is expected to moderate from the high growth we saw in 2021, and vacancy rates are expected to remain below long-term historical levels.
Closing Remarks
Finally, I’d like to point out that we published a financial supplement along with today’s 10-K filing, which can also be found on our webpages.
With that, I’ll turn it back to you, Hugh.
Hugh R. Frater:
Thanks again for joining us, everyone. We’ll speak with you again next quarter.
Fannie Mae Moderator:
Thank you, ladies and gentlemen. That concludes today’s call. You may disconnect.