FEDERAL NATIONAL MORTGAGE ASSOCIATION We have been under conservatorship, with the
as conservator, since September 6, 2008 . As conservator, FHFA succeeded to all rights,
titles, powers and privileges of the company, and of any shareholder, officer or director of
the company with respect to the company and its assets. The conservator has since provided
for the exercise of certain functions and authorities by our Board of Directors. Our
directors owe their fiduciary duties of care and loyalty solely to the conservator. Thus,
while we are in conservatorship, the Board has no fiduciary duties to the company or its
stockholders.
We do not know when or how the conservatorship will terminate, what further changes to our
business will be made during or following conservatorship, what form we will have and what
ownership interest, if any, our current common and preferred stockholders will hold in us
after the conservatorship is terminated or whether we will continue to exist following
conservatorship. Members of Congress and the Administration continue to express the
importance of housing finance system reform.
We are not currently permitted to pay dividends or other distributions to stockholders. Our
agreements with the U.S. Department of the Treasury ("Treasury") include a commitment from
Treasury to provide us with funds to maintain a positive net worth under specified
conditions; however, the U.S. government does not guarantee our securities or other
obligations. Our agreements with Treasury also include covenants that significantly restrict
our business activities. For additional information on the conservatorship, the uncertainty
of our future, and our agreements with Treasury , see "Business-Conservatorship, Treasury
Agreements and Housing Finance Reform" and "Risk Factors-GSE and Conservatorship Risk" in
our Form 10-K for the year ended December 31, 2021 ("2021 Form 10-K").
You should read this Management's Discussion and Analysis of Financial Condition
and Results of Operations ("MD&A") in conjunction with our unaudited condensed
consolidated financial statements and related notes in this report and the more
detailed information in our 2021 Form 10-
Forward-looking statements in this report are based on management's current expectations and are subject to significant uncertainties and changes in circumstances, as we describe in "Forward-Looking Statements." Future events and our future results may differ materially from those reflected in our forward-looking statements due to a variety of factors, including those discussed in "Risk Factors" and elsewhere in this report and in our 2021 Form 10-K.
Introduction
Our revenues are primarily driven by guaranty fees we receive for assuming the
credit risk on loans underlying the mortgage-backed securities we issue. We do
not originate loans or lend money directly to borrowers. Rather, we work
primarily with lenders who originate loans to borrowers. We securitize those
loans into
Effectively managing credit risk is key to our business. In exchange for assuming credit risk on the loans we acquire, we receive guaranty fees. These fees take into account the credit risk characteristics of the loans we acquire. Guaranty fees are set at the time we acquire loans and do not change over the life of the loan. How long a loan remains in our guaranty book is heavily dependent on interest rates. When interest rates decrease, a larger portion of our book of business turns over as more loans refinance. On the other hand, as interest rates increase, fewer loans refinance and our book turns over more slowly. Since guaranty fees are set at the time a loan is originated, the impact of any change in guaranty fees on future revenues depends on the rates at which loans in our book of business turn over and new loans are added.
Fannie Mae First Quarter 2022 Form 10-Q 1
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MD&A | Executive Summary
Executive Summary
Summary of Our Financial Performance
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Q1 2022 vs. Q1 2021
•Net revenues increased
•Net income decreased
•Net worth increased to
Financial Performance Outlook
We expect lower amortization income in 2022 compared with 2021, driven by
reduced refinancing activity. In addition, we expect a shift from significant
credit-related income in 2021 to modest credit-related expense in 2022. We
expect those factors to result in lower net income in 2022 compared with 2021.
See "
Fannie Mae First Quarter 2022 Form 10-Q 2
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MD&A | Executive Summary
Liquidity Provided in the First Quarter of 2022
Through our single-family and multifamily business segments, we provided
Fannie Mae Provided$255 Billion in Liquidity in the First Quarter of 2022 Unpaid Principal Balance Units$104B 312K Single-Family Home Purchases$135B 487K Single-Family Refinancings$16B 136K Multifamily Rental Units
We continued our commitment to green financing in the first quarter of 2022,
issuing a total of
Legislation and Regulation
The information in this section updates and supplements information regarding legislative, regulatory, conservatorship and other developments affecting our business set forth in "Business-Conservatorship, Treasury Agreements and Housing Finance Reform" and "Business-Legislation and Regulation" in our 2021 Form 10-K. Also see "Risk Factors" in our 2021 Form 10-K and in this report for discussions of risks relating to legislative and regulatory matters.
Final Rule Amending the Enterprise Regulatory Capital Framework
On
•replaces the fixed leverage buffer equal to 1.5% of our adjusted total assets with a dynamic leverage buffer equal to 50% of our stability capital buffer;
•replaces the prudential risk weight floor of 10% on any retained credit risk transfer exposure with a prudential risk weight floor of 5% on any retained credit risk transfer exposure;
•removes the requirement to apply an overall effectiveness adjustment to our retained credit risk transfer exposures; and
•implements technical corrections to other provisions of the enterprise
regulatory capital framework published on
These amendments to the enterprise regulatory capital framework increase the capital relief afforded by credit risk transfer transactions and reduce the amount of capital we will be required to hold relative to the requirements under the original framework; however, the amount of capital we will be required to hold under the amended enterprise regulatory capital framework remains substantially higher than the previously applicable statutory minimum capital requirement.
To be fully capitalized under the enterprise regulatory capital framework, we
must meet all applicable leverage capital requirements and risk-based capital
requirements, including applicable buffers, under the standardized approach of
the rule. As of
Fannie Mae First Quarter 2022 Form 10-Q 3
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MD&A | Legislation and Regulation
of our available capital (deficit) to this requirement. For more information regarding our capital requirements under the amended enterprise regulatory capital framework, see "Liquidity and Capital Management-Capital Management-Capital Requirements" and "Note 14, Regulatory Capital Requirements." Also see "Business-Legislation and Regulation-GSE-Focused Matters-Capital-Enterprise Regulatory Capital Framework" in our 2021 Form 10-K for additional information on the enterprise regulatory capital framework.
Although FHFA has amended the enterprise regulatory capital framework, our
senior preferred stock purchase agreement with
Federal LIBOR Transition Legislation
On
The LIBOR Act provides that the
Interagency Action Plan to Advance Property Appraisal and Valuation Equity
In
Fannie Mae First Quarter 2022 Form 10-Q 4
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MD&A | Key Market Economic Indicators
Below we discuss how varying macroeconomic conditions can influence our financial results across different business and economic environments. Our forecasts and expectations are based on many assumptions, subject to many uncertainties and may change, perhaps substantially, from our current forecasts and expectations. For further discussion on housing activity, see "Single-Family Business-Single-Family Mortgage Market" and "Multifamily Business-Multifamily Mortgage Market."
Selected Benchmark Interest Rates
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(1)Refers to the
(2)According to Bloomberg.
(3)Refers to the daily rate per the
How Interest Rates Can Affect Our Financial Results
•Net interest income. In a rising interest-rate environment, our mortgage loans tend to prepay more slowly. We amortize various cost basis adjustments over the life of the mortgage loan, including those relating to loan-level price adjustments we receive as upfront fees at the time we acquire single-family loans. As a result, any prepayment of a loan results in an accelerated realization of those upfront fees as income. Therefore, as loan prepayments slow, the accelerated realization of amortization income also slows. Conversely, in a declining interest-rate environment, our mortgage loans tend to prepay faster, typically resulting in the opposite trend of higher net amortization income from cost basis adjustments on mortgage loans and related debt.
•Fair value gains (losses). We have exposure to fair value gains and losses resulting from changes in interest rates, primarily through our mortgage commitment derivatives and risk management derivatives, which we mark to market through earnings. Fair value gains and losses on our mortgage commitment derivatives fluctuate depending on how interest rates and prices move between the time a commitment is opened and when it settles. The net position and composition across the yield curve of our risk management derivatives changes over time. As a result, interest rate changes (increases or decreases) and yield curve changes (parallel, steepening or flattening shifts) will generate varying amounts of fair value gains or losses in a given period.
Fannie Mae First Quarter 2022 Form 10-Q 5
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MD&A | Key Market Economic Indicators
•Credit-related income (expense). Increases in mortgage interest rates tend to lengthen the expected lives of our loans. Generally, the expected impairment and provision for credit losses associated with impaired loans increases as the expected lives of our mortgage loans increase and decreases as the expected loan lives shorten.
•Interest rates have increased significantly since
Single-Family Quarterly Home Price Growth Rate(1)
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(1)Calculated internally using property data on loans purchased by
How Home Prices Can Affect Our Financial Results
•Actual and forecasted home prices impact our provision or benefit for credit losses as well as the growth and size of our guaranty book of business.
•Changes in home prices affect the amount of equity that borrowers have in their homes. Borrowers with less equity typically have higher delinquency and default rates.
•As home prices increase, the severity of losses we incur on defaulted loans that we hold or guarantee decreases because the amount we can recover from the properties securing the loans increases. Declines in home prices increase the losses we incur on defaulted loans.
•As home prices rise, the principal balance of loans associated with purchase money mortgages may increase, causing growth in the size of our guaranty book. Additionally, rising home prices can increase the amount of equity borrowers have in their home, which may lead to an increase in origination volumes for cash-out refinance loans with higher principal balances than the existing loan. Replacing existing loans with newly acquired cash-out refinances can affect the growth and size of our guaranty book.
•Home price growth in the first quarter of 2022 was driven by low levels of housing supply relative to the level of demand. We believe some of the demand in the first quarter was driven by home buyers accelerating home purchases in anticipation of further increases in mortgage interest rates.
•While we expect home price growth on a national basis to remain strong in 2022, we do not expect the pace of rapid home price growth that we have experienced over the last year to continue. We expect home price growth to moderate from an annual growth rate of 19.1% in 2021 to 10.8% in 2022, with most of this growth occurring in the first half of the year. We expect slower home price growth in the second half of 2022 and in 2023, driven by interest-rate increases, inflation and reduced affordability, especially for low- and moderate-income borrowers. We also expect that some regions of the country may experience home price declines in 2023.
Fannie Mae First Quarter 2022 Form 10-Q 6
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MD&A | Key Market Economic Indicators
New Housing Starts(1)
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(1)According to
How Housing Activity Can Affect Our Financial Results
•Two key aspects of economic activity that can impact supply and demand for housing and thus mortgage lending are the rates of household formation and housing construction.
•Household formation is a key driver of demand for both single-family and multifamily housing as a newly formed household will either rent or purchase a home. Thus, changes in the pace of household formation can affect prices and credit performance as well as the degree of loss on defaulted loans.
•Growth of household formation stimulates homebuilding. Homebuilding has
typically been a cyclical leader, weakening prior to a slowdown in
•With regard to housing construction, a decline in housing starts results in fewer new homes being available for purchase and potentially a lower volume of mortgage originations. Construction activity can also affect credit losses through its impact on home prices. If the growth of demand exceeds the growth of supply, prices will appreciate and impact the risk profile of newly originated home purchase mortgages, depending on where in the housing cycle the market is. A reduced pace of construction is often associated with a broader economic slowdown and may signal expected increases in delinquency and losses on defaulted loans.
•We expect a continued lack of inventory for both new and existing homes and worsening affordability will likely continue to constrain home sales into the second quarter of 2022. We expect single-family housing starts to be similar in 2022 as in 2021, as the pace of new construction continues to be affected by supply chain disruptions and labor shortages. Given the constraints on home sales and new construction, we expect housing activity to decline in 2022 compared to 2021.
Fannie Mae First Quarter 2022 Form 10-Q 7
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MD&A | Key Market Economic Indicators
GDP, Unemployment Rate and Personal Consumption
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(1)Real GDP growth (decline) and personal consumption growth (decline) are based
on the quarterly series calculated by the
(2)According to the
How GDP, the Unemployment Rate and Personal Consumption Can Affect Our Financial Results
•Changes in GDP, the unemployment rate and personal consumption can affect several mortgage market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies, which in turn can lead to credit losses.
•Economic growth is a key factor for the performance of mortgage-related assets. In a growing economy, employment and income are typically rising, thus allowing borrowers to meet payment requirements, existing homeowners to consider purchasing and moving to another home, and renters to consider becoming homeowners. Homebuilding typically increases to meet the rise in demand. Mortgage delinquencies typically fall in an expanding economy, thereby decreasing credit losses.
•In a slowing economy, employment, income growth and housing activity typically slow as an early indicator of reduced economic activity. Typically, as an economic slowdown intensifies, households reduce their spending. This reduction in consumption then accelerates the slowdown. An economic slowdown can lead to employment losses, impairing the ability of borrowers and renters to meet mortgage and rental payments, thus causing loan delinquencies to rise. Home sales and mortgage originations also typically fall in a slowing economy.
•GDP declined 1.4% on an annualized basis during the first quarter of 2022. We currently expect GDP growth in 2022, as we expect the factors that contributed to the decline in the first quarter will not persist for the remainder of the year. We expect that a modest recession is likely to occur after this year, most likely in the second half of 2023, resulting in an increase in the unemployment rate. We expect our economic outlook will be influenced by a number of factors that are subject to change, such as the persistence of inflationary pressures, the speed at which expected monetary policy tightening is adjusted, the impact of the Russian invasion of
Fannie Mae First Quarter 2022 Form 10-Q 8
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MD&A | Key Market Economic Indicators
See "Risk Factors" in this report and "Risk Factors-Market and Industry Risk" in our 2021 Form 10-K for further discussion of risks to our business and financial results associated with interest rates, home prices, housing activity and economic conditions.
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