As Prepared for Delivery
Good morning and welcome to our first quarter earnings conference call.
Today’s discussion will cover the following items:
I want to start by saying that I hope you and your families are staying safe and remaining positive during these challenging times.
To frame this morning’s discussion and highlight both the unprecedented environment in which we are operating and the significant stress in both our country and our markets–I think it is worth reviewing the news we have received just in the last week–a relatively uneventful week I might add, by comparison to past weeks–and the situation we find ourselves in:
And finally, let me speak generally about forbearance in this time of crisis. We have been working hard to ensure that borrowers and lenders are familiar with the forbearance options that are available to them, and we’re seeing the number of forbearance requests increase significantly in both the Single-Family and Multifamily businesses; and we expect those numbers to continue to rise. We are closely watching them and know that many are keenly interested in learning more about where those numbers stand, and we hope to have more to say about them in the near future.
In spite of all this, I’m pleased to report that, so far, our book is generally performing well, and we are withstanding this crisis. We have acted quickly to provide direct relief to millions of homeowners and property owners and indirectly to renters hurt by the pandemic. We are also looking to support our lender partners by making it easier for them to close and sell us loans.
Let me spend a few minutes explaining some of the things we have done.
Homeowners
For homeowners who are unable to pay their mortgages due to pandemic-related financial hardships, we have offered relief designed to help them stay in their homes through and beyond this difficult time.
Here are some of the actions Freddie Mac has taken through its servicers.
Renters
In the rental market, we took action to provide relief to multifamily property owners with as many as 4.2 million renters in more than 27,000 rental properties across the nation. The CARES Act has strengthened this action, now protecting all renters in GSE-backed properties from eviction for nonpayment of rent for 120 days. The forbearance we provide to multifamily owners alleviates some of the cash flow pressure they might otherwise have faced and enables them to more comfortably provide accommodations to their tenants.
While that is good news, the fact remains that our toolbox to help renters in financial distress is limited. Regardless, we are educating renters about their options through various outreach efforts, including a newly-launched consumer website and counseling services.
Lenders
We also have taken action to support lenders so they in turn can help more families either purchase or keep their homes. In short, we quickly made selling loans to us easier and faster, so funds continue to flow through the system to borrowers.
In the single-family business, this includes:
For our Multifamily lenders, we have announced a number of policy changes that provide unprecedented flexibility, so that appraisal and inspection decisions can be made on a case-by-case basis to protect the safety of landlords, renters and our staff.
Other Market Participants
We are also doing our part to help other market participants. For example, we have taken steps to shore up the vendors that help us keep the mortgage market functioning.
For our suppliers, we have accelerated our payment on invoices, so the more than 200 small and diverse businesses we work with receive payment from us at least 20 days earlier than the standard payment terms. Earlier access to these funds will help cash-strapped businesses make payroll and cover overhead expenses during the crisis. We, as a company, are very proud of this effort.
Freddie Mac
Let me now turn inward and talk a little about Freddie Mac’s business continuity efforts. Early in the pandemic, we activated our Crisis Management Team and continuity plans to ensure we will be there day in and day out for our customers, our investors and for the rest of the market while also protecting our staff.
The results of our business resiliency actions to date have been outstanding and we have exceeded our own expectations in terms of our ability to seamlessly maintain continuity in all of our business operations.
So far, Freddie Mac has experienced no significant operational or technology issues associated with the pandemic despite nearly 99 percent of our employees working remotely.
Open for Business
Taking a step back, these efforts highlight an important fact: Freddie Mac is open for business, both in terms of the extraordinary steps we have taken and in continuing to fulfill our day-to-day mission. We continue to purchase loans in every market, every day.
We are continuing to bring new multifamily security issuances to market. We priced several “K-Deals” over the past month and expect to continue doing so in the weeks ahead. And we have been in the market with new issuances of single-family mortgage-backed securities as well.
A Stabilizing Force, a Transformed Company
Our response to the pandemic shows how far we have come as a company from the 2008 Financial Crisis.
Throughout the recent events, Freddie Mac has been a stabilizing force in the U.S. housing finance system – demonstrating that we are a very different company than the one that entered conservatorship 12 years ago.
Now, let’s turn to our first quarter financial results.
We earned comprehensive income of $0.6 billion, a decrease of $1.8 billion compared with the fourth quarter 2019.
The decrease from the prior quarter was driven by:
The impact from interest rate changes this quarter was minimal due to our effective use of hedge accounting, and while our expected credit losses are higher due to COVID-19, they are being partially offset by expected recoveries from credit enhancements, like STACR and ACIS. As of March, CRT transactions, including STACR and ACIS, covered 51 percent of the single-family credit guarantee portfolio.
And although our GAAP net interest income was down from the prior quarter, our adjusted measures for net interest income and guarantee fee income, which more clearly reflect our sources of revenue, remained strong, both increasing slightly from the prior quarter.
Our total equity now stands at $9.5 billion, compared with $9.1 billion at December 31. The added capital strengthens our balance sheet in the face of this crisis, and it advances our goal of responsibly exiting conservatorship.
You’ll note that the increase in total equity, which typically tracks with our comprehensive income, was less than the $0.6 billion we earned. This is due to an adjustment to retained earnings made on January 1 related to our adoption of CECL, which totaled approximately $240 million.
Returning to CRT for a moment, Single-Family continued to transfer credit risk in the first quarter, completing CRT transactions that protect more than $140 billion of unpaid principal balance with maximum coverage of more than $5 billion.
Risk distribution also continued in Multifamily–our K-deal program was tested in the quarter and passed. In fact, Freddie Mac Multifamily successfully sold “unguaranteed” subordinate securities that did not benefit from our own guarantee or even the prospect of support from the government during a period of significant dislocation.
We also have maintained high levels of liquidity on our own balance sheet and we are positioning ourselves to be well prepared for challenges ahead related to underlying economic stress. We were able to access both short-term and long-term debt markets as needed. In the month of March, we issued approximately $55 billion of debt, with about $33 billion of it having maturities greater than one year.
We followed that up with an issuance of our Reference Notes in April, the second of the year so far, with the first in February.
These issuances demonstrate that our access to funding markets remains intact and that we have the wherewithal to meet our financial obligations and meet the funding needs of customers.
Looking to our business results, we executed on our mission of providing liquidity, stability and affordability to the housing market.
In the first quarter:
The challenge now becomes keeping up that momentum through deeply uncertain times.
Which brings me to our outlook for the housing market for the rest of the year.
We expect the COVID-19 pandemic to have a significant effect on our business into 2021, and perhaps beyond.
With large parts of the U.S. economy shut down to fight the pandemic, the housing market faces its greatest challenge in more than a decade.
Based on current assumptions, we expect home sales to fall significantly this quarter and then begin to recover over the next year. While home prices increased in the first quarter, the future effect of the COVID-19 pandemic is highly uncertain and dependent on the pace of economic recovery. The decline in home prices could be significant if forbearance and foreclosure mitigation do not limit the effect on home prices.
In addition, the Federal Reserve’s purchases of mortgage securities have helped stabilize mortgage markets and lower mortgage rates.
We expect rates to remain low over the next two years and result in an increase in mortgage refinance activity that largely offsets the decline in purchase money mortgages.
We expect serious delinquency rates and the volume of loss mitigation activity to increase significantly in the near-term due to the pandemic; and while we believe the forbearance programs that we announced represent effective loss mitigation in the short term, we will likely see higher delinquencies and defaults in the future as the underlying forbearance agreements end. This is in large part why our loan loss reserves have increased.
Clearly, we have some difficult and uncertain times ahead.
But we remain steadfast, well managed and committed to our important role in the U.S. housing finance system and the U.S. economy.
I want to thank everyone we work with who has pulled together through this crisis. That includes not only the tireless team at FHFA, but also our customers, our investors and countless other market participants–like real estate professionals, home builders and housing counselors.
I also want to thank the millions of homeowners and renters who put their faith in Freddie Mac, its lenders and servicers, as they struggled–and in some cases continue to struggle–through the hardship brought about by this crisis.
Finally, I want to thank the thousands of Freddie Mac staff who have soldiered on during an unprecedented time to ensure Freddie Mac remains … open for business.
I will now take your questions.
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David Brickman
CEO*
Kevin Palmer
SVP, Single-Family Portfolio Management
Donna Corley
Executive Vice President, Head of Single-Family Business
David Brickman and Hugh R. Frater
David Brickman
CEO*
*David Brickman left his position with Freddie Mac in 2020.
Freddie Mac delivered a strong third quarter performance while supporting the housing market and families affected by the pandemic.
Over the last week, there has been significant discussion about the two companies where we serve as CEOs, Fannie Mae and Freddie Mac, and the independent regulator and conservator that oversees us, the Federal Housing Finance Agency. The issues raised are too important for us not to address.
Freddie Mac continued to respond to unprecedented challenges while serving its mission in the second quarter.
Milestones provide an important opportunity to pause, take stock of the past and look ahead to the challenges and opportunities the future holds.
The last few weeks have been ones of deep reflection, sadness and anger in the wake of the tragic killings of George Floyd, Breonna Taylor and Ahmaud Arbery.
In 2019, Freddie Mac delivered solid earnings, with strong returns and executed on our mission of providing liquidity, stability and affordability to the housing market.
More so than any time in the past 11 years, we at Freddie Mac believe our fate is in our own hands.
We remain in excellent financial health and we are fully supporting our mission of providing liquidity, stability and affordability to the rental and home purchase markets.
As CEO of Freddie Mac, my top priority is to capitalize on our transformation and bring us into the next chapter.
As many as 12 million U.S. households devote more than half their income to housing. As house prices and rents rise, the demand for affordable housing increases as well.
Freddie Mac Multifamily is on track to purchase and securitize record volumes of loans. Barring any surprises, the multifamly market could grow 5 to 10 percent in 2017.
Our first Freddie Mac 55+ Survey found that shifting housing choices by Baby Boomers and older adults may sharpen the already acute shortage of affordable housing.
Ten years ago, Freddie Mac Multifamily envisioned a future multifamily housing finance system, and began the process of transforming our business – and we haven't looked back.