Federal National Mortgage Association (FNMA) Q4 FY2025 Earnings Call Transcript & Summary

Good day, and welcome to the Fannie Mae Fourth Quarter and Full Year 2025 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 today's webcast to discuss Fannie Mae's fourth quarter and full year 2025 financial results. Please note this webcast includes forward-looking statements, including expectations related to housing market, economic and competitive conditions and their impact, the future performance and credit characteristics of the company's book of business, the company's future financial performance and the company's future plans and their impact. Future events may turn out to be very different from these statements. The forward-looking statements and Risk Factors sections of the company's 2025 Form 10-K filed today identify factors that may lead to different results. A recording of this webcast may 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 We ask that you do not record this webcast for public broadcast and that you do not publish any full transcript. I'd now like to 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's Chief Financial Officer, Chryssa Halley.

Good morning, and thank you for joining Fannie Mae's Fourth Quarter and Full Year 2025 Earnings Call. I'm honored to lead Fannie Mae at such a pivotal time for the housing market. For more than 87 years, Fannie Mae has been a cornerstone of the U.S. housing finance system, focusing on its core mission to provide liquidity, stability and affordability to the housing market. Today, I'm pleased to announce solid earnings with net income of $3.5 billion in the fourth quarter and full year net income of $14.4 billion, ending the year with $109 billion in net worth. Our 2025 results mark 14 consecutive years of annual profitability, reflecting the reliability of our business, our enduring commitment to risk management and our continued progress towards a stronger capital position. Our financial performance allows us to deliver on our mission. And in 2025, we provided $409 billion of liquidity to the mortgage market, helping approximately 1.5 million households, including 704,000 homebuyers, more than half of whom were buying a home for the first time. Underlying our strong financial performance was a year of continued operational excellence, driven by disciplined expense management and ongoing progress to simplify our core processes and technology infrastructure. Additionally, we delivered innovative capabilities to enhance internal operating efficiencies and drive stronger outcomes for our customers, including solutions designed to improve loan quality, strengthen fraud detection and enhance quality control within our operations. I want to end by thanking Director Pulte, our Board of Directors, the FHFA team, our business partners and everyone who works at Fannie Mae. Their unwavering commitment to the company and the housing industry positions us to be a best-in-class company. I am excited about our momentum and look forward to moving into 2026 from a position of strength. I will now turn the call over to our Chief Financial Officer, Chryssa Halley.

Thank you, Peter, and good morning, everyone. Starting with our fourth quarter performance on Page 2. As Peter said, our net income was $3.5 billion for the quarter. Our earnings continue to be driven by our core business where we earn guaranty fees in exchange for providing credit protection on mortgage-backed securities we issue in the secondary market. These fees are recorded as net interest income and accounted for 81% of fourth quarter net revenues. Fourth quarter net income was down 9% as fair value losses slipped from gains in the third quarter. Investment gains declined and administrative expenses increased. I'll cover administrative expenses and other noninterest expenses on Page 8. During the quarter, the majority of fair value losses were driven by the compression in interest rate spreads, which are not covered by hedge accounting. On the right-hand side, a few comments on key metrics. Our guaranty fees were stable quarter-over-quarter at $5.9 billion. Our administrative expense ratio, while strong at 12.6%, is up for the quarter from personnel actions, consulting and other administrative costs, but we expect it will improve in future quarters. Finally, we remain focused on building capital. To help evaluate our financial performance and capital efficiency, we calculate an illustrative return on the required equity measure based on annualized year-to-date net income divided by our average common equity Tier 1 capital requirement. The fourth quarter and full year illustrative return was 10.2%. Turning to Page 3. As Peter mentioned, our net income was $14.4 billion in 2025. For the year, we continue to see strong and stable revenues, including higher guaranty fees as the single-family book slowly turns over at higher fees and the multifamily book grows. Our noninterest expense was $141 million lower as we started to realize the benefits of our cost reduction efforts and continue to focus on operational efficiency. However, we built our allowance in 2025, recording a provision for credit losses versus a benefit in 2024, which I'll talk about more on Page 7. Also, fair value gains in 2025 were lower compared to 2024 when there were larger impacts from residual effects of fair value changes not covered by hedge accounting, including gains in our trading securities as they moved closer to maturity and gains from changes in interest rate spreads. The shift to provision for credit losses and lower fair value gains drove a 15% decrease in net income compared to the prior year. On Page 4, we highlight the size and stability of our guaranty business. As of the third quarter, we remained the largest guarantor of residential mortgage debt outstanding in the U.S., backing an estimated 25% of single-family and 21% of multifamily mortgage debt outstanding. Our average guaranty book has stayed above $4 trillion since 2022, even with lower levels of refinancing volumes since then due to higher mortgage rates. Net interest income remained steady at $28.6 billion with a $305 million increase in guaranty fees, but a $708 million decrease in portfolio income driven by higher debt expense as we replaced maturing lower coupon debt. On Page 5, we have gradually increased our average total book guaranty fees since 2015, which allows for strong net interest margin at 66.5 basis points in 2025, down from 2021 and 2022, where net interest margin was elevated from higher single-family refinance volumes. I will discuss the key factors that impact pricing when I discuss our business segment results. Turning to our credit metrics on Page 6. We saw increases in delinquencies in the fourth quarter. The 4 basis point increase in single-family's seriously delinquent loans was due primarily to seasonal factors and an increase in forbearance from the government shutdown. For multifamily, seriously delinquent loans increased 6 basis points as accumulated pressure on properties following sustained market challenges, combined with recent softness in rent and net operating income growth has led to a rise in delinquent loans and net charge-offs in recent years. Based on these ongoing challenges, we believe multifamily delinquency levels could increase in 2026. Touching briefly on our allowance on Page 7. This quarter, we built our single-family allowance by $208 million, driven by new purchase acquisitions, which tend to have a higher allowance rate than refinance loans as well as increased delinquencies and reduced our multifamily allowance this quarter by $93 million with stabilized property values and charged-off loans exceeding the allowance for new acquisitions. Moving to Page 8. Efficiency remains a top priority. Fourth quarter administrative expenses were up $102 million from the prior quarter, driven by personnel costs and seasonal factors. However, for the full year of 2025, we reduced administrative expense by $40 million and total noninterest expense by $141 million compared to 2024. The decline in administrative expense was driven primarily by reducing our workforce by approximately 1,200 employees, scaling back contractors and renegotiating key contracts. This year included a $95 million increase in severance and a $55 million increase in occupancy expense related partially to reducing our real estate footprint. Finally, following steady increases since 2021, our administrative expense ratio improved in 2025, declining from 12.45% in 2024 to 12.36%. Page 9 includes the key components of our CET1 capital requirements, which have remained stable quarter-over-quarter. This quarter, total risk-weighted assets, or RWA, increased by 3% and risk density increased by 1 percentage point from the prior quarter to 31.9%. These increases reflect higher credit risk weights on new acquisitions and reduced capital relief from credit risk transfer or CRT runoff. We continue to use CRT as a tool to manage regulatory capital. And over the last few years, we have enhanced our CRT program to increase its effectiveness in providing capital relief while reducing premium and deal costs. Finally, more than 55% of our total CET1 capital requirements were driven by our stress capital and stability capital buffer requirements. On Page 10, we highlight our success in continuing to build our net worth and make steady progress towards meeting our capital requirements. Since January 2020, we have increased our net worth by $95.5 billion, including $48.7 billion since we began reporting our capital position under the enterprise regulatory capital framework for the fourth quarter of 2022. Now turning to the results of our 2 business lines, starting with our single-family business on Page 11. Our single-family business delivered $2.7 billion in net income in the fourth quarter in the face of continued affordability challenges and strong competition. While the decline in mortgage rates late in the third quarter drove a $19 billion increase in fourth quarter refinance acquisition volumes, competitive market dynamics, including the impact of our capital requirements on pricing, compressed our share of new business and made it difficult to fully replace loan runoff with new acquisitions. We expect these factors could persist in 2026. On pricing, the single-family book continues to turn over at higher guaranty fees with fourth quarter average guaranty fees on new acquisitions 6.7 basis points higher than the average guaranty fee on the total single-family guaranty book. As a reminder, our single-family pricing is influenced by many factors, including our capital requirements, the credit profile of new acquisitions and market conditions. On underwriting, Page 12 reinforces that we have not sacrificed credit quality for volume. The credit profile of our single-family acquisitions continued to be strong in 2025 with acquisition credit metrics trending consistently compared with recent years across weighted average OLTV, weighted average FICO score and DTI ratio. Turning to the multifamily business on Page 13. Through 2025, multifamily priced business competitively to grow the guaranty book to $535 billion by year-end, a $35 billion increase year-over-year. This larger book drove fourth quarter net income of $850 million and full year net income of $2.9 billion, which is the highest level in 4 years. The average guaranty fee on the total multifamily guaranty book was 71.6 basis points in the fourth quarter. To price our multifamily business, we consider many factors, including individual loan characteristics and external forces such as interest rates, MBS spreads, the availability and cost of other sources of liquidity and our mission-related goals. Business volume in the fourth quarter increased 38% quarter-over-quarter, bringing full year volume to $73.7 billion, our highest acquisition volume in 5 years. Growth in the multifamily business did not come at the cost of credit quality. On Page 14, we highlight the credit profile of the multifamily book. Weighted average debt service coverage and original loan-to-value metrics for both the guaranty book and new acquisitions remained roughly in line with 2024 levels. The percentage of our book with a current debt service coverage ratio below 1 was approximately 4% as of year-end 2025 compared with 6% as of year-end 2024. Because of our unique DUS risk-sharing model and our CRT programs, nearly all our multifamily guaranty book has some form of credit protection at year-end. Finally, on Page 15, we are effectively managing our balance sheet, especially as our net worth has increased with retained earnings. For example, funding needs this year were primarily satisfied by earnings retained from our operations versus new debt issuances. We also reinvested assets from the corporate liquidity portfolio to the higher-yielding retained mortgage portfolio, which ended the year at $132.5 billion. For example, we increased our holdings of agency MBS this year to achieve higher returns and support market and lender liquidity. We plan to continue investing in agency MBS while remaining in compliance with portfolio limits and managing the interest rate risk associated with our retained mortgage portfolio. To wrap up, this quarter's results highlighted a few important themes. Our core guaranty business continues to serve as a durable foundation for our revenue base. We've been effective at building capital through retained earnings, and we reduced costs for the year and increased operating effectiveness, which we expect to drive sustained value over time. Looking forward, we expect these themes to continue in 2026 as we meet the evolving needs of the housing market and operate in a safe and sound manner. Thank you again for joining today's webcast.

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