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Edited Transcript of FMCC earnings conference call or presentation 1-May-19 1:00pm GMT

Q1 2019 Federal Home Loan Mortgage Corp Earnings Call

McLean May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of Federal Home Loan Mortgage Corp earnings conference call or presentation Wednesday, May 1, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Donald H. Layton

Freddie Mac - CEO & Director

* Jeffrey Markowitz

Freddie Mac - Senior VP of External Relations & Corporate Communications

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. My name is Laura, and I will be your conference operator today. At this time, I would like to welcome everyone to the Freddie Mac First Quarter 2019 Financial Results Media Call. (Operator Instructions)

I would now like to turn the call over to Jeffery Markowitz, Senior Vice President of External Relations and Corporate Communications. You may begin your conference.

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Jeffrey Markowitz, Freddie Mac - Senior VP of External Relations & Corporate Communications [2]

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Thank you. And good morning, everyone, and thank you for joining us for a discussion of Freddie Mac's first quarter 2019 financial results. We're joined today by the company's CEO, Don Layton; President, David Brickman; CFO, Jim Mackey; and CAO, Jerry Weiss.

Before we begin, we'd like to point out that during this call, Freddie Mac executives may make forward-looking statements, which are based on a set of assumptions about the company's key business drivers and other factors. Changes in those factors could cause the company's actual results to vary materially from its expectations. A description of those factors can be found in the company's quarterly reports on Form 10-Q filed earlier today.

Freddie Mac executives also may discuss non-GAAP financial measures. For more information about those measures, please see our earnings release and related materials, which are posted on the Investor Relations section of freddiemac.com.

Our commentary today will be limited to business and market topics. As you know, we cannot comment on public policy or legislation concerning Freddie Mac.

As a reminder, this call is for the media and only they can ask questions. It is being recorded, and a replay will soon be available on freddiemac.com. We ask that the call not be rebroadcasted or transcribed.

With that, I will now turn the call over to Don Layton, Freddie Mac's CEO.

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Donald H. Layton, Freddie Mac - CEO & Director [3]

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Good morning, and thank you for joining us to review our financial and business performance for the first quarter of 2019. As you probably know, this will be my last such call as I retire on June 30 when David takes over. I will first review the quarter's specifics, and then, as I look back on 7 years as Freddie Mac's CEO, give some high points of what I call reform while in conservatorship for both Freddie Mac and the housing finance system more generally.

The first quarter generated comprehensive income of $1.7 billion, up 13% from the prior quarter. This is in line with the range we have produced quarterly for some time now, and as with all financial institutions, we measure earnings versus the capital employed to generate them.

In conservatorship, we use what is called CCF, the Conservatorship Capital Framework. Our return on that conservatorship capital, known as ROCC, was 12.7%. That's a good level. Behind this bottom line are the key drivers of our performance.

First, our guarantee book of business is growing nicely, up 5% from the prior year, 4% for single-family and 14% for multifamily, and this continues the trend of growing faster than our main competitor.

Second, our credit quality continues to be strong. The single-family delinquency rate was down to 67 basis points, the lowest since 2007 12 years ago, even though it is still burdened by legacy assets from before 2009, including relief refinancing loans. Excluding those legacy assets, the delinquency rate is just 22 basis points, a low level reflecting strong underwriting and a long-term trend of improving house prices since they bottomed in 2011.

Multifamily continues to have a near 0 delinquency rate of just 3 basis points. Its non delegated underwriting business model has produced excellent credit results for some time now. In fact, the number of foreclosed properties we currently own is 0. And all these current statistics are gross, meaning they do not take into consideration our credit risk transfer program and the reality that losses would only partially affect Freddie Mac's bottom line. More on this later.

Third, with the $2.2 trillion balance sheet, we are very much subject to financial market conditions. We have worked hard to provide strong transparency to you regarding the impact of market volatility on our bottom line. In Q1, the result was very low, less than $100 million. This compares very favorably to an earnings reduction of about $600 million the prior quarter when markets were unusually volatile.

Fourth, as a GSE, we are very focused on risking capital needed to -- and the capital need to support it. Between our emphasis on CRT, our long-term effort to dispose of legacy assets beyond simply waiting for runoff and strong house price appreciation, we continue to steadily reduce our aggregate conservatorship capital required. It was down 10% in the last year, that's $6.1 billion less of taxpayer backing needed to support our risks.

And last, all of us at Freddie Mac work here to support the company's mission to provide liquidity and stability to the primary mortgage market and also to make home possible on a safe and sound basis for as many people as we can. Last quarter, we again delivered on that mission, financing nearly 450,000 homes for families to own or rent.

Add it all up and Freddie Mac is now a well-run financial institution that produces good earnings without undue volatility, steadily reducing the taxpayers' exposure to our risk and fulfilling our congressionally mandated mission.

Now let me sit back and reflect on 7 years at the heart of America's housing finance system. I stated publicly when I joined the company that I was doing so as a public service to help improve our mortgage system, both specifically at Freddie Mac and more generally by working with government officials. The GSE conservatorship was unprecedented in size and scope, no one knew how long it would last or quite what it would look like. What I can say now is that conservatorship has been the vehicle for major reform of Freddie Mac, the GSEs and even in the housing finance system more broadly.

For Freddie Mac alone, how things have changed? First, competitiveness. We're now a regular competitive company, helping our customers and the industry catch up to other consumer finance markets in using technology and improving efficiency. Our IT investment budget is now 2.5x what it was when I arrived. There's now no more duopolous -- duopoly or cartel mindset here. Our organization competes and competes hard but always with proper requirements for safety and soundness.

David started this competitive business model long ago at multifamily where GSE -- Freddie Mac's GSE market share by percent has increased in the last decade from the mid-40s to the mid-50s. In single-family, our market share percentage has also gone up in my tenure from the mid-30s to the low 40s, and recently even higher. In fact, we had some things break our way in March and our market share was either just below or just above 50%, depending upon which exact measure you prefer.

Second, we have broken the cycle of overdependence upon the taxpayer for support. Our mortgage-related investments portfolio is down approximately $400 billion or 2/3 since I arrived and is now fully dedicated to supporting the guarantee businesses. In 2018, under CCF, we estimated the capital required by our balance sheet to be approximately $50 billion. That's down about 2/3, a very major improvement from our estimated capital requirement in 2013 as measured by our predecessor to CCF. Part of this was a good housing market, part of this was aggressively disposing of legacy assets an activity that was nonexistent until 2013 when I set it as a target and appointed people who knew how to do it well. But that part that may be most impactful over the long term was the innovation by Freddie Mac of the invention of -- by Freddie Mac of modern GSE credit risk transfer.

David began this way back in 2009 as a core component of the smart new business model. In multifamily today, over 80% of the CCF capital required for credit risk on the entire existing book of business has been replaced by private market capital. Our new flow of the number usually is over 90%.

In single-family, about 80% of the capital on new flow now comes from private markets. We only began using CRT and single-family in 2013 and it took time to ramp up. We estimate almost 40% of the total book CCF requirement for credit capital is now provided by private markets, and that will grow substantially over time in the routine course of doing business and going over the portfolio.

In Washington, there was much talk about trying to reduce taxpayer exposure to GSE risk and the need to bring more private capital into the market. In fact, we've accomplished both of those in very large amounts through CRT. We at Freddie Mac invented it. We are widely recognized as its biggest proponents, and we have executed to match our enthusiasm.

More broadly, the GSE system has benefited from these and other changes now being implemented through the FHFA at both companies. First, on June 3, we are scheduled to go to a single security, which means Freddie Mac and Fannie Mae will both offer a uniform mortgage-backed security. Forward trading of this security is already underway, and it is going well. This is a major and welcome change. It means more liquidity, ideally lower mortgage rates, more efficiency and in a possible future state, it enables more competition. Freddie Mac is a big but by no means the only beneficiary of this change, and we were the lonely proponents of it back in 2012 and 2013. It took a long time but it's now upon us and we are feeling really good about that.

Second, CRT is now regarded by virtually all outside commentators as a key feature to maintain in a possible future state. It is a major change in U.S. housing finance. Also, it is the only proven method so far of truly reducing the systemic concentration of $5 trillion of mortgage risk in just 2 companies that are by law monoline. This helps overall U.S. financial stability.

Third, working with FHFA, we produced what are called eligibility standards for doing business with the 2 GSEs. One of these applies to mortgage insurers, which performed poorly in 2008 financial crisis and needed to improve, the other applies to nonbank seller servicers, which are a bigger share of the market, and thus, it's increasingly important that they remain safe and sound.

And last, capital. The GSEs were long considered undercapitalized. In conservatorship, to make proper risk/reward decisions, Freddie Mac developed its own internal economic capital system back in 2013, basing it on the capital concepts being applied to SIFIs. That was a first. Several years later, the FHFA, liking what it saw developed its own SIFI-consistent system, which is not surprisingly was quite similar to ours and required both GSEs to use it for decision-making starting in 2017, 2 years ago. It is the basis for much of the rulemaking now being proposed for the GSEs in the future, and it all started with us here at Freddie Mac.

So let me close as I prepare to hand over the keys to David on July 1. First, I hope you can appreciate the major change and improvement in U.S. housing finance. It was at the heart of the 2 financial crises since World War II. The credit crisis of the late 1980s and the more recent one a decade ago. It needed fundamental reform, and it is my belief that the conservatorship years have dramatically produced a lot of that reform. What happened before should not happen again. It really riles us when someone says nothing has changed in conservatorship, that is totally and completely untrue.

Second, we've gone from follower to leader among the GSEs. With people like David and our other senior leaders, we have been at the forefront of most of the major reforms these last 7 years, including changing the mindset from duopolous to competitor. CRT is most obvious example, but it's not the only one.

As I leave, I know the company would be in good hands with David at the helm. He did a fabulous job with -- at multifamily, which was ahead of the rest of the company on almost all major business model improvements before the rest of the system began to focus on them. And it is my fondest hope that the policy and political process and the conservatorship itself continues to build in all the good, solid practical reform we've implemented over the last 7 years.

Thanks for listening, and now over to Q&A.

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Operator [4]

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(Operator Instructions) There are no questions at this time. Speakers, you may continue.

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Donald H. Layton, Freddie Mac - CEO & Director [5]

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Okay. Well, then thank you for joining us this morning. Again, it's been a great 7 years for me. I wish everyone luck covering Freddie in the future, and good morning.

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Operator [6]

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This concludes today's conference call. Thank you, everyone, for your participation. You may now disconnect.