Federal National Mortgage's (FNMA) CEO Tim Mayopoulos on Q3 2015 Results - Earnings Call Transcript
Nov. 7, 2015 7:34 PM Conference Call November 5, 2015 8:00 AM ET
Operator
Thank you for joining the media call and webcast to discuss Fannie Mae’s Third Quarter 2015 Financial Results. Please note that this call may include forward-looking statements, including statements about the company’s future performance, business plans and strategy.
Future events may turn out to be very different from these statements. The risk factors and forward-looking statements sections in the company’s third quarter 2015 Form 10-Q filed today and its 2014 Form 10-K filed on February 20, 2015 describe factors that may lead to different results.
As a reminder, this call is being webcast and recorded by Fannie Mae and the recording may be posted on the company’s website. This call cannot be recorded for broadcast by any participant other than Fannie Mae.
Following remarks from Fannie Mae’s President and CEO, Tim Mayopoulos, we’ll open the media conference call line for questions from reporters. Those of you participating via webcast, your lines will be muted throughout the call. [Operator Instructions] All lines will be muted unless you are asking a question.
I’d now like to turn the media conference call over to your host, Tim Mayopoulos. Please go ahead.
Tim Mayopoulos - President & CEO
Thank you very much. Good morning, everyone. Thanks for joining us today as we share our third quarter 2015 financial results. We had another strong quarter of financial performance, with strong business fundamentals. These results also punctuate our ongoing progress in bringing positive change to the housing finance system, including innovative technology solutions for customers and improvements to our business model that reduce risk for taxpayers. I’m proud of our leadership in these areas, and we expect to be a catalyst for more positive change going forward.
Let me summarize our third quarter results and then update you on some specific areas of progress. We reported net income of $2 billion and comprehensive income of $2.2 billion for the third quarter of 2015. This was our 15th consecutive quarter of profitability. Our book of business is very solid, providing stable guaranty fee revenue, which in recent years has become a primary driver of our overall revenue and an increasing portion of our net interest income.
This is a result of increases to our guaranty fees and decreases to our retained mortgage portfolio, which, if you remove the loans that we bought out of mortgage-backed securities trusts because of delinquency, is down from $900 billion at its peak to less than $200 billion today. We expect this trend to continue.
As we noted in our 10-Q filing, we expect to remain profitable on an annual basis for the foreseeable future. Nonetheless, there are exogenous factors that we do not control, such as changes in interest rates or home prices. These factors can result in significant volatility in our financial results from quarter-to-quarter or year-to-year. We saw some of that volatility this quarter, as we had net fair value losses, compared with net fair value gains in the second quarter.
Based on our strong third quarter results, we expect to pay Treasury another $2.2 billion in dividends by the end of December, bringing total cash dividends paid to Treasury to $144.8 billion, compared with $116.1 billion we received in support. As a reminder, our dividend payments to Treasury do not offset prior draws.
Now, let me step back a bit and offer a few observations on our results, our progress over the past several years, and our path forward. First, we have in place strong underwriting, eligibility, and risk management standards to protect taxpayers. These are standards that we have been using since 2009.
Question-and-Answer Session
Operator
And our first question comes from [Joe Light]. Your line is now open.
Unidentified Analyst
Hi. Good morning. Thanks for taking the question. I was wondering if you could talk a little bit about the kinds of borrowers you're seeing this year. A report came out a few days ago basically showing that the number of purchased loans going to borrowers with a FICO score below 700 has actually dropped this year, and in addition to that, we're not really seeing much of a pickup in first time buyer share, at least that I've seen. What do you think is keeping these borrowers I guess first of all, are you guys seeing, similar trends and what do you think is keeping these borrowers away? Is it a demand issue or are there still overlay issues, or what do you think is going on?
Tim Mayopoulos - President & CEO
So thanks, Joe, for the question. Appreciate it. Well, I think there are a number of things going on, so I don't think there's any simple answer to the question. First, I think we have had an increase in refinancing activity given where interest rates have gone this year, going down, and as, when that happens we get more refinancing acquisitions as opposed to purchase money acquisitions, and typically the credit scores of people who are refinancing their loans tend to be higher than people who are purchase money buyers. So that’s part of it, I think.
I do think also that there’s really some evidence that some borrowers think that what they need to be able to qualify for a loan is more than what they really do need. So we’ve done some research in this area and we see that, especially among younger people and minority people, that they have a tendency to believe that they need higher credit scores to qualify for a loan than is in fact the case. And as a result, they may choose just not to apply for those loans or to pursue buying a house. So I think there’s an education process that needs to go on in the marketplace to make people more aware of that.
And then third, while I think many overlays have come off, I think lenders are still cautious. And I think what we’ll see is kind of a gradual move in that area and I doubt that we’ll see anything particularly dramatic, but I think that our goal at the end of the day is not to change our credit box. We’ve been very consistent in terms of what we’re prepared to acquire, but what we do see is that lenders are not delivering to us to the full range or extent of our credit box, and so some of the things that we’ve been doing, like, coming out with our HomeReady product, which allows people to borrow up to 97% loan-to-value, is to make it clear to the marketplace that we are prepared to buy those loans, that that credit is available and to encourage consumers to come forward with those applications. So I think it’s a complicated story, but we’re trying to focus on elements of it.
Operator
Thank you. And our next question comes from the line of [Bonnie Sinnock]. Your line is now open.
Unidentified Analyst
Hi. Good morning. I wanted to see if it was possible for you to go over those repurchase numbers again and how those have been reduced.
Tim Mayopoulos - President & CEO
Sure. So these are numbers for all of 2014. So these are all the single-family loans we acquired during 2014. So that’s 1.9 million single-family loans that were delivered to us during the course of the year. Of those, we have issued repurchase requests on less than 7,700 of those, and then of those requests, as a result of either the lender correcting the problem or providing us with more information to resolve our issue, less than 1,900 of those loans were actually repurchased by the lenders. So, you have 1.9 million single-family loans delivered to us in 2014, less than 1,900 of those were actually repurchased by lenders.
Operator
Thank you. [Operator Instructions] Our next question comes from Lorraine Woellert. Your line is now open.
Unidentified Analyst
Hi, guys. Following up on the repurchase question, can you give us some context on the 1,900 were actually repurchased in 2014? You had requested 7,700. Can you go back a couple of years? How much lower are those numbers?
Tim Mayopoulos - President & CEO
Yes, I don’t have those numbers in front of me, but obviously if you go back a few years where we were reviewing loans that had been delivered to us in the years leading up to the crisis, the volume of repurchase demand was much, much higher. So we can get you some of those detailed figures, but I just don’t happen to have them there in front of me right now.
I think one other thing I’d just like to mention since we’re talking about repurchases here, is that, as you know, we changed the representation and warranty framework to have kind of an automatic release of representations and warranties by lenders as loans matured. And so overtime, the reps and warrants basically go away.
And so just to remind you, more than a million loans that we have acquired since January 2013 are now free and clear of repurchase liability for breaches of certain representations and warranties, and that number will only increase overtime. So in the next few years, millions of additional loans delivered to us would expect to receive similar repurchase relief.
So I think the rate of requests for repurchase has gone way down, and in addition, the changes to the representation and warranty framework that give lenders rep and warrant relief going forward, I think will have a dramatic impact on this issue.
Operator
Thank you [Operator Instructions]. And I am showing no further questions on the phone line at this time. I would like to turn the call back to Tim Mayopoulos.
Tim Mayopoulos - President & CEO
Thank you. And thank you all for your attention this morning. We appreciate your questions. We wish you a good day. We'll talk to you in another quarter. Thanks a lot.
Operator
Thank you, ladies and gentlemen. This concludes today's conference. You may all disconnect and everybody have a great day.
