Federal National Mortgage Association (FNMA) Earnings Call Transcript

Good day, and welcome to the Fannie Mae's Third Quarter 2026 Financial Results Webcast. At this time, I will now turn it over to your host, Terence O'Hara, Fannie Mae's Director of Enterprise Communications.

Hello, and thank you for joining this webcast to discuss Fannie Mae's financial results for the third quarter of 2026. Please note this webcast includes forward-looking statements, including expectations related to the company's business plans and strategies and their impact, the company's future financial condition and performance the future performance and credit characteristics [indiscernible]. Future events may turn out to be very different from these statements. Factors that may lead to different results are identified in the forward-looking statements section of the company's third quarter 2026 Form 10-Q filed today and the forward-looking statements and Risk Factors sections of the company's 2025 Form 10-K filed February 11, 2026. A recording of this webcast will be posted on the company's website. We ask that you do not record this webcast for public broadcast and that you do not publish any full transcript. And now I will turn the call over to Fannie Mae's acting Chief Executive Officer and Chief Operating Officer, Peter Akwaboah. who will be followed by Fannie Mae Chief Financial Officer, Chryssa C. Halley.

Good morning, and thank you for joining us today, reflecting on our third quarter results. We are proud of the critical role we play in helping to make housing more accessible and affordable for homeowners and renters nationwide. As you hear from Chryssa in more detail, elevated interest rates have all impacts our business. We also continue to put pressure on housing affordability, making Fannie Mae's mission particularly important. So far, in 2026, we provided $344 billion in liquidity to the mortgage market, helping approximately 1.2 million households, including more than 295,000 first-time homebuyers. Year-to-date, 46% of our [indiscernible] acquisition and 77% of our multifamily acquisitions, SAP, households and in less than or equal to 100% of area median income, supporting affordable homeownership and rental opportunities across America. And continuing on the progress discussed last quarter, our efforts to provide appraisal and title insurance alternatives helped home buyers saved an estimated $141 million in closing costs so far this year. Alongside our mission, we remain committed to the following priorities: strengthen our financial resilience by building our network and managing risks, advanced technologies to improve execution while maintaining expense discipline and enhance the housing finance system in ways that promote greater choice, transparency and sustainable access to home ownership. For example, during the quarter, we expanded VantageScore 4.0 as an additional credit score model to all Fannie Mae approved lenders. Loans originated using Vantage score 4.0 remains subject to existing tri-merge credit report requirements. We also announced enhancements to our single-family MBS and CRT disclosures to provide multiple credit scores. These priorities are powered by our talented team and strong business model, which generated $4.2 billion in net income in the third quarter and grew our net worth to over $119 billion, providing the foundation to support the housing finance system and affordability for borrowers. Thank you to our employees and our partners. And with that, I will turn it to Chryssa walk through our financial results.

Thank you, Peter, and good morning, everyone. Before discussing our third quarter financial results, I want to briefly discuss the interest rate environment. Interest rates moved meaningfully higher throughout the third quarter with the largest increases occurring late in the quarter as markets reassessed the outlook for economic growth and the level of interest rates need to contain inflation. Changes in interest rates affect various aspects of our financial results. For example, in single family, while higher rates tend to reduce acquisition volumes, they also slowed prepayment and book runoff helping to preserve guarantee revenues. From an allowance perspective, flow prepayments extend the expected life of our loans which, combined with higher mortgage costs for certain borrowers can increase our expected credit losses. In multifamily, elevated interest rates put downward pressure on pricing and property values as well as new business volumes and their associated revenues. These lower property values, combined with higher debt service costs also contribute to higher expected credit losses in the multifamily allowance. On the balance sheet, higher interest rates affect both portfolio income and the fair value of certain assets. Higher rates are generally favorable for portfolio income as new and short-term assets reprice at higher yields, and we continue to optimize funding costs. However, given our recent efforts to reduce our earnings sensitivity to changes in short-term interest rates, the income uplift from higher rates has moderated, and we have recorded unrealized losses on our available-for-sale securities. The extent we continue to hold these securities accumulated unrealized losses will reverse over time as the securities approach maturity. Finally, our hedge accounting program is designed to reduce earnings volatility from changes in benchmark interest rates although the effects of other market factors remain, including changes in spreads. Starting with our financial results on Page 2. The third quarter highlighted the resilience of our business model with net income of $4.2 billion, up 5% quarter-over-quarter and 8% year-over-year. Our earnings continued to be powered by large and stable net revenues, which reached $7.7 billion in the third quarter, the highest level since 2023 with 79% of net revenues generated from our core guarantee business. At the same time, we experienced volatility in the following areas. Both single-family and multifamily built their allowance for credit losses drive a combined credit loss provision of $1.1 billion. The credit loss provision was partially offset by other gains in the third quarter including fair value gains of $630 million and investment [indiscernible] of $94 million. We also recorded $1 billion in net unrealized losses on our available-for-sale portfolio. Wrapping up this page, we increased our net worth by $3.1 billion and improved our illustrative return on required equity by 30 basis points from the second quarter, demonstrating our continued focus on capital efficiency and strengthening our financial position. Page 3 reinforces the scale and stability of our guaranteed business. Despite pressure on acquisition volumes and book growth, our $4.1 trillion guarantee book generated over $6 billion in guarantee fee income in the third quarter, over 70% of which was generated from loans and related MBS from 2022 and earlier. Both single-family and multifamily continue to generate higher base guarantee fee revenue and portfolio income was 4% higher quarter-over-quarter, primarily from higher average balances and yields on our corporate liquidity portfolio. Year-over-year, portfolio income increased from higher interest income on our larger retained mortgage portfolio. Building on the previous page, Page 4 demonstrates our continued price expanding net interest margin. Year-to-date, net interest margin increased to 69.2 basis points. Our guarantee fees continued to anchor stable margins as an increase in average single-family guarantee fees more than offset a decrease in average guarantee fees in our multifamily business. The increase in net interest margin in 2026 has been primarily driven by growth in our retained mortgage portfolio. Moving to expenses on Page 5. Operational efficiency runs a top priority. In the third quarter, we lowered our administrative expenses by [$27] million and improved our ratio by 47 basis points from the second quarter. In particular, occupancy and technology expenses were $52 million lower than the second quarter, which included costs associated with reducing our real estate footprint. Year-over-year, reductions in both occupancy expenses and professional services contributed to the $35 million decline in administrative expenses. These savings more than offset higher salaries and employee benefits in the third quarter included $28 million in severance expense. Other income shifted to other expense in the third quarter, primarily driven by activities in the multifamily business that I will address further in the segment highlights. Turning to our credit metrics on Page 6. The percentage of single-family loans 60 days or more past due increased in the third quarter and the serious delinquency rate increased to 62 basis points. We believe recent increases in both metrics are due in part to adverse macroeconomic conditions, including higher interest rates and persistent inflation challenges, which constrained household budgets particularly for lower-income borrowers. While these metrics remain at historically levels, we are closely monitoring the credit performance of our guarantee book including lower-income borrowers who are more sensitive to these affordability challenges. The multifamily serious delinquency rate also increased to 62 basis points in the third quarter due to sustained market challenges, partially offset by foreclosure activity. Looking ahead, we expect ongoing multifamily market challenges to result in additional delinquencies. As previously mentioned, page 7 shows we increased our total allowance by $906 million in the third quarter. Our single-family allowance increased by $580 million, driven primarily by higher actual and forecasted interest rates as well as the allowance build associated with newly acquired loans and loans that became delinquent during the quarter. In the third quarter, we recognized $114 million of net charge-offs and recorded a $694 million provision for credit losses. Our multifamily allowance increased by $326 million, driven primarily by weakening credit metrics on multifamily loans, a decline in our near-term property value forecast and elevated interest rates. During the quarter, we recognized $120 million of net charge-offs and recorded a [indiscernible] million provision for credit losses. On Page 8. The single-family business continued to generate stable net revenues of $6.3 billion in the third quarter. Single-family acquisitions were lower quarter-over-quarter, primarily due to lower refinance volumes from higher mortgage rates, a trend we expect to continue if mortgage rates being elevated. The average guarantee fee on third quarter acquisitions increased slightly from the second quarter and our $3.6 trillion single-family guarantee book continued to reprice higher. Finishing the page with net income, other gains more than offset the higher credit loss provision, contributing to an increase in net income quarter-over-quarter and year-over-year. Page 9 highlights the strong credit quality of our third quarter single-family acquisitions. The weighted average original loan-to-value ratio, or OLTV, increased slightly from 2025 levels to 78%, primarily due to a higher percentage of purchase acquisitions in the third quarter which also contributed to a higher share of single-family loans with OLTV greater than 95% and DTI greater than 43%. Meanwhile, weighted average FICO scores remained relatively stable year over quarter. On Page 10, multifamily generated net revenue of $1.3 billion in the third quarter, an increase of 4% quarter-over-quarter and 9% year-over-year. Multifamily new business volume of $14.5 billion was 2% higher than the prior quarter but lower than the same period last year, primarily due to increased competition and pressure on overall volumes from higher interest rates. The primary driver of lower multifamily net income quarter-over-quarter and year-over-year was a higher credit loss provision in the third quarter, which was partially offset by higher expected credit enhancement recoveries. Despite the increase in expected recoveries higher foreclosed property expenses pushed noninterest expense higher quarter-over-quarter. On Page 11, we remain focused on the credit quality of our multifamily guarantee book. While the weighted average debt service coverage and original loan-to-value metrics for the guarantee book and new acquisitions remained in line with 2025 levels. As described earlier, other weakening credit metrics on multifamily loans contributed to our allowance build this quarter. Finally, because of our unique DUS risk-sharing model and our credit risk transfer or CRT programs, nearly all of our multifamily guarantee book had some form of credit protection at quarter end. Turning to our balance sheet on Page 12. Our corporate liquidity portfolio decreased in the third quarter as we used portfolio proceeds to repay maturing long-term debt and grow the retained mortgage portfolio to $180 billion primarily through purchases of Agency MBS. On Page 13, we present the drivers of our regulatory capital requirements. Risk-weighted assets and risk density increased quarter-over-quarter, reflecting higher market risk on the retained mortgage portfolio, credit risk on acquisitions and a weaker credit profile in the multifamily book. These increases were partially offset by lower inflation adjusted loan-to-value ratios in single-family RWA as well as more capital release from CRT transactions. As a result, our minimum CET1 capital requirement remained relatively stable in the third quarter. To wrap up on Page 14. Our third quarter results underscores strength of our business model and durable revenue base. Despite volatility across aspects of our financial results, -- we increased net income both quarter-over-quarter and year-over-year, growing net worth to more than $119 billion while reducing our regulatory capital deficit. Our financial strength enables us to continue providing reliable liquidity and stability across market cycles, while fulfilling our mission in a safe and sound manner. Thank you again for joining today's webcast.

Thank you, everyone. That concludes today's call. You may disconnect.