Federal Home Loan Mortgage Corporation (FMCC) CEO Michael DeVito on Second Quarter 2021 Earnings – Earnings Call Transcript

Federal Mortgage Corporation on Home Loans (OTCQB: FMCC) Second Quarter 2021 Earnings Conference Call July 29, 2021 9:00 a.m. ET

Participating companies

Jeffrey Markowitz – Deputy Administrative Director

Michael De Vito – Chairman and CEO

Chris Lown – Chief Financial Officer

Conference call participants

Operator

Thank you for being here, and welcome to the media call for Freddie Mac’s second quarter 2021 financial results. At this time, all participants are in listen-only mode. [Operator Instructions]

I now have the pleasure of introducing Assistant General Manager, Jeffrey Markowitz.

Jeffrey Markowitz

Good morning, and thank you for joining us for a presentation of Freddie Mac’s second quarter 2021 financial results. I’m Jeff Markowitz, assistant general manager. We are joined today for the first time by our new CEO, Michael DeVito; and by our Chief Financial Officer, Chris Lown.

Before we begin, we’d like to point out that during the call, Mr. DeVito and Mr. Lown may make forward-looking statements based on assumptions about the company’s key business drivers and other factors. Changes in these factors could cause the Company’s actual results to differ materially from its expectations. A description of these factors can be found in the Company’s Quarterly Report on Form 10-Q filed today.

Mr. DeVito and Mr. Lown may also discuss non-GAAP financial measures. For more information on these actions, please see our earnings press release and related materials which are posted in the Investor Relations section of freddiemac.com.

Our commentary today will be limited to trade and market topics. As you know, we cannot comment on public policy or legislation regarding Freddie Mac. This call is recorded and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcast or transcribed.

With that, I’ll turn the call over to Freddie Mac CEO Michael DeVito.

Michael De Vito

Hello and thank you for joining us. I am happy to participate in my first earnings call for Freddie Mac. Today I’m going to offer some early thoughts on the company’s priorities before handing them over to our Chief Financial Officer, Chris Lown, who will review our finances and outline some of the life-saving relief we’ve provided during the pandemic.

I have worked with Freddie Mac for nearly three decades as a lender and repairer. During this period, I have developed a great respect for the company. So let me start by stating that I strongly believe in the important role Freddie Mac plays in the housing market and its mission, a term I use extensively.

For more than 50 years, Freddie Mac has supported this mission by providing liquidity stability and continually striving to advance affordability through our core operations. We have many opportunities to support affordable housing to further this mission.

First, with a renewed focus on achieving our housing goals and reaching underserved markets. In addition, thanks to the financial contributions we make to two affordable housing funds. Above all, I believe Freddie Mac can be a source of positive influence in solving long-standing issues of fundamental fairness for people and communities of color at all income levels. This mission and these opportunities are among the main reasons why I joined the firm.

Going forward, we have several goals for our business. First, we are committed to ensuring that Freddie Mac is a world-class risk manager. We have a solid base and talented employees to achieve this goal. With continued focus, we can demonstrate safety and soundness and continually improve how we assess risk while broadly supporting the housing finance market through the economic cycle. In short, the better our risk management, the more broadly we can serve our mission even in the face of a crisis.

Second, we focus on building capital and improving financial performance, which is the foundation that underpins the risks we manage, promotes safety and soundness, and serves as an important springboard for the long-term aspirations of our company after guardianship. As you are about to hear, our retained earnings for this quarter contributed significantly to this objective.

And finally, we support and develop our people, especially the training of the next generation of leaders. We are privileged to have a strong management team and our goal is to continue to grow our team as an investment in the strength, stability and industry leadership of Freddie Mac over the long term. I look forward to sharing our progress on this work over the coming quarters.

And now I’m going to hand the presentation over to our CFO, Chris Lown.

chris lown

Hello. I am pleased to report that Freddie Mac had another strong quarter. We achieved net income of $3.7 billion and comprehensive income of $3.6 billion, increases of $1.9 billion and $1.7 billion respectively from the second quarter of the year. ‘Previous exercice. These increases are attributable to higher net incomes and a release of the credit reserve mainly in the single-family segment.

Second quarter net income totaled $5.9 billion, a 41% increase from $4.1 billion in the prior year quarter, primarily due to higher net interest income. Net interest income increased 66% year over year to $4.8 billion. This increase is due to the increase in net interest income from single-family homes.

Realized real estate price appreciation and improved economic conditions led to the release of reserves during the quarter, resulting in a $0.2 billion benefit on credit-related items, compared to credit-related expenses of $0.7 billion for the second quarter of 2020.

Let’s move on to our individual business segments. In the single-family segment, net income increased $2.1 billion from the prior year quarter to $2.9 billion. This increase is explained by higher net interest income, mainly due to the continued growth of the mortgage loan portfolio, higher average guarantee fee rates and higher recognition of deferred fee income. In addition, credit-related items, including the release of reserves partially offset by lower credit enhancement recoveries, contributed to the increase in net income.

New business activity of $288 billion increased on strong home buying and refinancing activity, from $232 billion in the second quarter of 2020, but declined from $362 billion in the first quarter of 2021. from the pandemic peak of 3.04% in the third quarter of 2020.

And during the quarter, single-family loan restructuring activity is helping approximately 88,000 families stay in their homes, including through forbearance agreements reached and 55,000 payment deferrals primarily related to the COVID-19 pandemic. 19. Approximately 1.67% of loans in the single family mortgage portfolio by number of loans were in forbearance as of June 30, 2021.

Looking at multifamily. The segment reported net income of nearly $824 million, down 18% from $1 billion in the year-ago quarter. Lower net investment gains drove the decline primarily due to less K-certificate spread tightening and the impact of lower volume.

The multifamily business recorded new business activity of $27 billion year-to-date, down $3 billion from the prior year period, due to increased competition and a reduced loan purchase limit. The multi-family mortgage portfolio grew 12% year-over-year to $398 billion.

The delinquency rate, which does not include multifamily loans and forbearance, was 0.15% as of June 30, 2021. This is an increase from the second quarter of last year, but in down from 0.17% as at March 31, 2021. As at June 30, approximately 94% of the multifamily mortgage portfolio was covered by credit enhancements.

On the capital front, our capital or net worth position increased to $22.4 billion at the end of the second quarter. This represents a 96% increase over the prior year quarter and a 19% increase over Q1 2021. Of course, our strong financial performance is vitally important in helping us fulfill our mission to deliver liquidity, stability and affordability.

Here are some highlights related to the mission of the quarter. We provided $306 billion of liquidity to the single-family and multi-family home markets during the quarter. Our funding has helped 1.2 million families buy, refinance or rent a home, a significant increase from the one million we supported in Q2 2020.

Strong refinancing activity helped us provide financing that reduced mortgage payments for 708,000 families. We supported 131,000 first-time buyers representing 47% of mortgages. And 77% of the 137,000 multi-family units we financed were affordable for families with incomes at or below 80% of the region’s median income. 97% were within reach of moderate-income families whose income was at or below 120% of the CHI.

Focus on our support related to the pandemic. Over the past year and a half, we’ve helped hundreds of thousands of homeowners and at-risk renters stay in their homes, while helping to keep America’s housing finance system stable. Overall, during the pandemic, we extended up to 18 months of forbearance to over 800,000 single-family borrowers. About 209,000 remained in abstention as of June 30.

Likewise, we’ve extended COVID-19-related forbearance to more than 1,400 eligible multi-family properties protecting tenants of 135,000 units from eviction for non-payment of rent. More recently, we expanded the use of interest rate reductions to help COVID-19-related distressed borrowers reduce their monthly mortgage payment.

And now I’m going to return the call to Michael.

Michael De Vito

Thanks Chris. As Chris suggested, the strong financial performance and support for our mission, which we have described today, are linked. Our mission guides our work and provides opportunities to broadly serve the housing finance market and make it accessible to everyone. Our financial success enables us to advance our mission to provide liquidity, stability and affordability in a safe and sound way.

Thanks again for joining us and I look forward to talking to you again next term.

Q&A session

End of Q&A

This concludes today’s program. Thank you for participating, you can now disconnect.

Priscilla C. Carnegie