Government)Investment)Oﬃcers)Associa2on) · 3 3 3...

Government Investment Officers Associa2on Las Vegas Conference

March 2015

©2015 Fannie Mae. Trademarks of Fannie Mae

Jim Zucco – Director Funding and Liquidity Management

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This presenta>on contains a number of es>mates, forecasts, expecta>ons, beliefs, and other forward-‐looking statements, including statements regarding Fannie Mae’s future serious delinquency rates, future funding needs, and future issuances of Connec>cut Avenue Securi>esTM. These es>mates, forecasts, expecta>ons, beliefs and other forward-‐looking statements are based on the company’s current assump>ons regarding numerous factors and are subject to change. Actual outcomes may differ materially from those reflected in these forward-‐looking statements due to a variety of factors, including, but not limited to, those described in “Execu>ve Summary,” “Forward-‐Looking Statements” and “Risk Factors” in our annual report on Form 10-‐K for the year ended December 31, 2014 (our “2014 Form 10-‐K”). Any forward-‐looking statements made by Fannie Mae speak only as of the date on which they were made. Fannie Mae is under no obliga>on to, and expressly disclaims any obliga>on to, update or alter its forward-‐looking statements, whether as a result of new informa>on, subsequent events, or otherwise.

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Senior Preferred Stock Purchase Agreement (SPSPA) Highlights

With the $4.0B dividend payment we paid to Treasury in the fourth quarter of 2014, we have paid a total of $134.5 B in dividend payments to the Treasury through December 31, 2014.

Net worth sweep dividend:

Wind-‐down of the mortgage asset porTolio:

§  Beginning in 2013, quarterly dividend payments equal any net worth as of the prior quarter end minus a capital reserve amount.

§  The capital reserve amount is $1.8B in 2015 and con>nues to reduce annually by $600M on a straight-‐line basis such that the amount is zero star>ng in 2018.

§  SPSPA mandated maximum mortgage por_olio size at the end of 2014 = $469.6B and then annually reduced by 15% un>l it reaches $250B

§  FHFA requested an addi>onal reduc>on of 90% of the annual SPSPA limit

§  For the year ended 2014, the por_olio cap was revised to $422.7B

Sources: U.S. Treasury Department Senior Preferred Stock Purchase Agreement; Fannie Mae 2014 Form 10-K and Fannie Mae Monthly Summary

*As of December 31, 2014

773 789 708 633 491 413*

650 553

423

$-‐ $100 $200 $300 $400 $500 $600 $700 $800 $900

$1,000

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

$ in billions

Year End

Mortgage Por_olio

Por_olio Size ($ in B)

Por_olio Cap ($ in B)

4 4 4

Selected Credit Characteris2cs of Single-‐Family Conven2onal Loans Held, by Acquisi2on Period

Loans we have acquired since January 1, 2009 were 81% of our single-‐family guaranty book of business as of December 31, 2014.

Percentage of Single-‐Family Conven2onal Guaranty Book of Business (1)

Current Es2mated

Mark-‐to-‐Market LTV Ra2o (2)

Current Es2mated Mark-‐to-‐Market

LTV Ra2o >100% (3)

Serious Delinquency

Rate (4)

Source: Fannie Mae 2014 Form 10-K

Year of Acquisi>on:

2009-‐2014 acquisi>ons, excluding HARP and other Refi Plus loans 62% 60% * % 0.24%

HARP loans(5) 11% 86% 19% 1.04%

Other Refi Plus loans(6) 8% 51% * % 0.37%

2005 – 2008 acquisi>ons 12% 81% 22% 8.17%

2004 and prior acquisi>ons 7% 48% 2% 3.28%

Total Single-‐Family Book of Business 100% 64% 5% 1.89%

As of December 31, 2014

1- Calculated based on the aggregate unpaid principal balance of single-family loans for each category divided by the aggregate unpaid principal balance of loans in our single-family conventional guaranty book of business as of December 31, 2014 and 2013. 2- The aggregate estimated mark-to-market LTV ratio is based on the unpaid principal balance of the loans as of the end of the applicable period divided by the estimated current value of the properties, which we calculate using an internal valuation model that estimates periodic changes in home value. Excludes loans for which this information is not readily available. 3- The current estimated mark-to-market LTV ratio greater than 100% is based on the unpaid principal balance of the loans with mark-to-market LTV ratios greater than 100% for each category as of the end of the applicable period divided by the aggregate unpaid principal balance of loans for each category in our single-family conventional guaranty book of business as of December 31, 2014 and 2013. 4- The serious delinquency rates for loans acquired in more recent years will be higher after the loans have aged, but we do not expect them to approach the levels of the December 31, 2014 serious delinquency rates of loans acquired in 2005 through 2008. 5- HARP loans, which we began to acquire in 2009, have LTV ratios at origination in excess of 80%. In the fourth quarter of 2012, we revised our presentation of the data to reflect all loans under our Refi Plus program with LTV ratios at origination in excess of 80% as HARP loans. Previously we did not reflect loans that were backed by second homes or investor properties as HARP loans. 6- Other Refi Plus loans, which we began to acquire in 2009, includes all other Refi Plus loans that are not HARP loans.

* Represents less than 0.5%

5 5 5

TX6.5%5.6%

MT4.5%0.3%

CA9.4%19 .6%

NM1. 6%0. 5%

AZ5 .5%2 .4%

NV9.5%1.0% CO

9. 2%2. 7%

WY3.5%0 .2%

OR7.4%1 .7%

UT3.7%1.1%

MN3.8%1.9%

ID4.5%0.5%

KS2. 9%0. 5%

NE2.5%0 .4%

SD3.4%0 .2%

ND5.7%0.1%

OK2.7%0.6%

MO2.7%1 .3%

WA6.4%3.5%

GA6.5%2.7%

I L4 .2%4 .1%

IA1.3%0.7%

WI2.6%1.8%

AR2. 1%0. 5% AL

0.7%1.0%

MS2.5%0 .4%

OH3.0%2 .1%

NC1.8%2.4%

NY3.9%5.5%

LA2.7%0.9%

PA1. 6%3. 0%

FL1 0. 0%5. 6%

TN3.9%1.3%

MI6.1%2.4%

KY2.9%0 .6%

VA2.3%3 .5%

IN1 .4%1 .2%

ME0. 9%0. 3%

SC3. 4%1. 2%

WV0.8%0.2%

MD2.6%2 .7%

NH4.2%0.5%

VT-0 .4%0.2%

MA2.9%3 .0%

NJ1.7%4.0%

CT1.3%1.3%

DE2.2%0 .4%

RI4.9%0.3%

DC12 .2%0.4%

One Year Home Price Change as of 2014 Q4* United States 4.7%

Source: Fannie Mae 2014 Credit Supplement

AK3 . 3%0 . 2%

HI6 . 8%0 . 8%

Below 0% 0% to 5% 5% to 10% 10% and above

State Growth Rate State: NM Growth Rate: 1.6% UPB %: 0.5%

Example

*Source: Fannie Mae. Home price estimates are based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of January 2015. UPB estimates are based on data available through the end of December 2014. Including subsequent data may lead to materially different results.

6 6 6

TX18. 0%5. 6%

MT7.4%0.3%

CA-22. 5%19. 6%

CO9. 7%2. 7%

NM-9.8%0.5%

UT0. 7%1. 1%

KS4. 5%0. 5%

OR-9. 7%1.7%

WY11. 4%0. 2%

AZ-31.1%2. 4%

NE6.6%0.4%NV

- 38.3%1. 0%

SD15. 3%0. 2%

MO-4.9%1.3%

MN-10.8%1. 9%I D

-12 .8%0. 5%

I A5. 9%0. 7%

ND43. 2%0.1%

OK10. 8%0.6%

AR0. 3%0. 5%

WI-7 .3%1.8%

WA- 10. 3%3.5%

AL-5 .0%1.0%

NC-3.2%2. 4%

GA-13.4%2.7%

MS-3.9%0. 4%

NY-5 .9%5. 5%

PA-1 .6%3. 0%

IN0 . 2%1. 2%

OH-7. 8%2. 1%

LA8. 6%0. 9%

KY3. 2%0. 6%

IL-17 .7%4. 1%

FL-33. 8%5. 6%

TN-0 . 0%1. 3%

MI- 16 . 6%2. 4%

VA-13. 3%3.5%

ME-7.7%0. 3%

SC-5 .2%1. 2%

WV0. 8%0. 2%

VT-7 .3%0.2%

MA-8.3%3. 0%

MD-21.9%2. 7%

NH-13. 6%0. 5%

NJ-21. 9%4.0%

CT- 19.5%1. 3%

DE- 16. 3%0.4%

RI-26. 3%0.3%

DC24. 7%0. 4%

United States -10.1% Home Price Change From 2006 Q3 Through 2014 Q4*

Below -30% -30% to -15% -15% to -5% -5% to 0% 0% to 5% 5% and Above

State Growth Rate State: NM Growth Rate: -9.8% UPB %: 0.5%

Example

AK8 .7%0 .2%

HI-4 . 0%0. 8%


*Source: Fannie Mae. Home price estimates are based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of January 2015. UPB estimates are based on data available through the end of December 2014. Including subsequent data may lead to materially different results. Note: Home prices on a national basis reached a peak in the third quarter of 2006.

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9.8% 13.6% 13.5% 1.7% -5.4% -12.0% -3.9% -4.1% -3.9% 6.5% 10.8% 5.0%

Home Price Growth/Decline Rates in the U.S.

Fannie Mae Home Price Index

**

*


7.6%

10.6% 11.3%

2.7%

-3.6%

-9.1%

-4.8% -4.3% -3.5%

4.1%

8.0%

4.7%

-15%

-10%

-5%

0%

5%

10%

15%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

*Estimate based on purchase transactions in Fannie-Freddie acquisition and public deed data available through the end of January 2015. Including subsequent data may lead to materially different results. **Year-to-date as of September 2014. As comparison, Fannie Mae’s index for the same period is 5.0%.

Based on our home price index, we estimate that home prices on a national basis increased by 4.7% in 2014, following increases of 8.0% in 2013 and 4.1% in 2012. Despite the recent increases in home prices, we estimate that, through December 31, 2014, home prices on a national basis remained 10.1% below their peak in the third quarter of 2006. Our home price estimates are based on preliminary data and are subject to change as additional data become available.

S&P/Case-Shiller Index (1)

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UPB ($ billions)* 2008 2009 2010 2011 2012 2013 2014

Agency Fixed Rate SF MBS/Loans 359 336 243 187 156 104 74

Agency CMOs 87 67 38 29 23 16 12

Agency SF Hybrids/ARMs 65 49 34 28 22 17 14

Non-Agency SF Mortgage Securities 58 50 45 40 36 27 20

Non-Agency MF (CMBS) 26 26 25 23 21 4 4

MF MBS/Loans 115 117 113 102 87 57 41

Reverse Mortgages Loans & Securities 41 50 51 52 50 48 45

Municipals (MRB) 15 14 13 11 8 6 5

Subtotals 766 709 561 472 403 280 214

Loans restructured in a TDR and Nonaccrual Loans 22 63 228 236 230 211 199 TDRs on accrual status 130 136 141 Nonaccrual loans 100 75 59

Totals 787 773 789 708 633 491 413

Year over Year Percent Change (2%) 2% (10%) (11%) (22%) (16%)* Numbers may not foot due to rounding

Capital Markets Mortgage PorTolio Composi2on

Source: Fannie Mae

Loans Restructured in a troubled debt restructuring or nonaccrual loans comprised approximately 48% of our mortgage porTolio as of December 31, 2014.

9 9 9

Agency Debt PorTolios -‐ Trending Downward

Source: fanniemae.com, freddiemac.com, fhlb-of.com

Debt Outstanding ($ blns)

Total Debt Outstanding 2012 2013 2014 Last Change v 2012 Fannie Mae 621 534 464 468 (153) Freddie Mac 557 512 457 446 (111)

FHLB 688 767 847 830 142 Total 1,866 1,813 1,768 1,744 (122)

Major Funding Programs

Discount Notes 2012 2013 2014 Last Change v 2012

Fannie Mae 105 72 105 104 (1) Freddie Mac 119 138 135 109 (10)

FHLBs 216 293 362 363 147 Total 440 503 602 576 136

Syndicated Bullets 2012 2013 2014 Last Change v 2012 Benchmarks -‐ Fannie 251 221 173 176 (75) Reference Notes-‐ Freddie 227 191 152 147 (80)

Globals -‐ FHLB 87 50 50 48 (39) Total 565 462 375 371 (194)

Fixed Rate Callables 2012 2013 2014 Last Change v 2012 Fannie Mae 177 169 115 115 (62) Freddie Mac 99 100 98 110 11

FHLBs 58 87 109 107 49 Total 334 356 322 332 (2)

o  Fannie/Freddie mandated to reduce on balance sheet assets. FHLB system balances driven by advance demand which remains strong

o  DN balances stable except for FHLB which has increased significantly leaving total outstandings higher

o  Less reliance on term bullets given por_olio reduc>on and advance based funding

o  Surprisingly total Agency callable balance remains unchanged

10 10 10 Source: Fannie Mae

Recent Spread History – Spreads Reflect Supply Story

0

2

4

6

8

10

12

14

Jan-‐13 May-‐13 Sep-‐13 Jan-‐14 May-‐14 Sep-‐14 Jan-‐15

Fannie Mae -‐ Three Month Cost of Funds Spread to Bills (BPs)

Discount Note spreads have moved higher when compared to Bills as total Agency outstandings have risen in the past three years

-‐10

0

10

20

30

40

Jan-‐13 May-‐13 Sep-‐13 Jan-‐14 May-‐14 Sep-‐14 Jan-‐15

Fannie Mae -‐ Five Year Cost of Funds Spread to LIBOR/UST (BPs)

LIBOR UST

Term funding spreads are at rich valua>ons as new issue supply in syndicated trades has waned

11 11 11 Source: fanniemae.com, barclayslive.com

Callable Debt Funding Why do the Agencies issue Callable Debt?

o  Asset/Liability management: Issuer owns the embedded call op>on which can be exercised when rates fall. Mirrors the prepayment op>on of mortgage assets which is at the homeowners’ discre>on through refinancing.

0

1

2

3

4

5

6

Jan-‐13 Mar-‐13 May-‐13 Jul-‐13 Sep-‐13 Nov-‐13 Jan-‐14 Mar-‐14 May-‐14 Jul-‐14 Sep-‐14 Nov-‐14 Jan-‐15

Barclays Aggregate Index MBS Component and Fannie Mae Dura2on Gap (years)

Barclays Agg MBS Dura>on Fannie Mae Dura>on Gap


Callable Debt Funding

Why do the Agencies issue Callable Debt?

o  Funding diversifica2on: Provides an investment product which debt investors may prefer to bullets given the opportunity for yield enhancement. Embedded op>on is sold back to the capital markets resul>ng in floa>ng rate funding.

Investor Agency Issuer

Dealer/Swap Counterparty

Embedded Call Op>on Embedded Call Op>on

Dollar Proceeds

Fixed Rate Coupon

Floa>ng Rate Coupon

Fixed Rate Coupon


Hedging Callable Issuance via Callable Swaps

What are the mechanics of “swapping” callable issuance?

o  Agency issuers compete for investor demand by offering a variety of maturity/lockouts/op>ons types

o  Provide dealer network floa>ng rate spread targets by maturity/lockout, generally the most aggressive LIBOR based funding spread wins the trade

o  Dealer network prices callable swap with counterpar>es that the issuers have approved for deriva>ve execu>on. Each issuer has an unique list but heavy cross over

Actual Example:

o  Investor expresses interest in 5nc1 European callable to dealer

o  Dealer requests funding targets from Agencies, GSE “A” is the most aggressive at L-‐8 (5 year cost of funds L-‐3, 1 year L-‐15)

o  Dealer has list of GSE “A” approved deriva>ve counterpar>es, requests pricing on the 5nc1 European at L-‐8 from those firms….highest fixed rate coupon wins

o  Execu>on coordinated between bond dealer/swap counterparty/GSE “A”, bond/swap priced at the same >me

14 14 14 Source: Bloomberg

Pricing Components of Callable Swaps

Bloomberg Func>on “SWPM Go” …Products/Op>ons/Cancelable Swap/European

Premium set to 0….calculator will solve for fixed rate coupon that equalizes swap and op>on premium

1

2

3

4

5

6

7

1 Fixed Rate Coupon on callable swap Lock/Call and Op>on Type 5 year swap rate Funding spread vs 3 month LIBOR Normal vola>lity used value op>on Net premium of swap set to zero Model used to price op>on

5

6

7

2

3

4


Callable Spread – Combina2on of Bullet Spread and Market Vola2lity

5 year Bullet spreads have remained in a narrow range, callable spreads have widened over the past year

The incremental spread for the callable can be atributed to rising implied vola>lity used to price the embedded op>on

0

10

20

30

40

50

60

Apr-‐14 Jun-‐14 Aug-‐14 Oct-‐14 Dec-‐14 Feb-‐15

5nc1 E Callable and 5 yr Bullet Spread to UST (BPs)

5nc1 E Spread 5 yr Bullet Spread

70

75

80

85

90

95

100

20

25

30

35

40

Apr-‐14 Jun-‐14 Aug-‐14 Oct-‐14 Dec-‐14 Feb-‐15

5nc1 Call Spread vs 1x4 Implied Vola2lity

Callable Spread to Bullet 1x4 BP Vol (RHS)


Implied Vola2lity – Terminology and Market Sources

Implied Vola>lity quoted in several ways. Black Vola>lity, Normal Vol (Black x Strike) and BPs per Day (Normal/ Sqrt (252)

Bloomberg NSV Screen will display all three quotes


Bloomberg “NSV Go” – Basis Points per Day

Market is pricing the future movements of swap rates prety equal across the curve. Though in general the belly (5 years) is priced to be the most vola>le


Why are Implied Vols Rising?? – Higher Past (Realized) Vol and End of QE

1x5 ATM Black implied vola>lity….forward looking index

Rolling 1 year realized vola>lity on 5 year swap rates over the same period


Movements in Vola2lity Translated into Callable Spreads

Change in coupon from a rise in implied vola>lity affects Bermudan op>ons more than European, short locks more than longer ones…longer maturi>es also more sensi>ve

0

1

2

3

4

5

6

7

8

9

10

3nc3mo B 3nc3mo E 3nc6mo B 3nc6mo E 3nc1yr B 3nc1yr E 5nc3mo B 5nc3mo E 5nc6mo B 5nc6mo E 5nc1yr B 5nc1yr E

10 BPs Normal Vola2lity Movement (BPs Coupon Change)


Frequent Investor Ques2on – Why Forward Seplement on New Issues?

o  Call no2fica2on process creates forward seplement of cash proceeds: o  FHLB/Freddie/Farm Credit – 5 Business Days o  Fannie Mae – 10 Calendar Days

o  Produces a higher fixed coupon for each day of forward seplement: o  Differen>al of callable coupon vs short rate o  Upward sloping yield curve

0

1

2

3

4

5

6

7

8

9

3nc0.25 E 3nc0.5 E 3nc1 E 5nc0.25 E 5nc0.5 E 5nc1 E

Coupon Increase Three Week Seplement (BPs)

o  5nc1 European Example

o  Callable vs short rate (200-‐ 17 BPs) * (21/360) = 11 BPs 11 BPs/3 year dura>on = 3.6 BPs

o  Curve Shape

5% -‐ (21/360) of 5/6 year swap curve (15 BPs) = .8 BP

o  Total of 4.4 BPs in higher coupon

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Copyright© 2015 by Fannie Mae. No Offer or Solicita2on Regarding Securi2es. This document is for general informa>on purposes only. No part of this document may be duplicated, reproduced, distributed or displayed in public in any manner or by any means without the writen permission of Fannie Mae. The document is neither an offer to sell nor a solicita>on of an offer to buy any Fannie Mae security men>oned herein or any other Fannie Mae security. Fannie Mae securi>es are offered only in jurisdic>ons where permissible by offering documents available through qualified securi>es dealers or banks. No Warran2es; Opinions Subject to Change; Not Advice. This document is based upon informa>on and assump>ons (including financial, sta>s>cal, or historical data and computa>ons based upon such data) that we consider reliable and reasonable, but we do not represent that such informa>on and assump>ons are accurate or complete, or appropriate or useful in any par>cular context, including the context of any investment decision, and it should not be relied upon as such. Opinions and es>mates expressed herein cons>tute Fannie Mae's present judgment and are subject to change without no>ce. They should not be construed as either projec>ons or predic>ons of value, performance, or results, nor as legal, tax, financial, or accoun>ng advice. No representa>on is made that any strategy, performance, or result illustrated herein can or will be achieved or duplicated. The effect of factors other than those assumed, including factors not men>oned, considered or foreseen, by themselves or in conjunc>on with other factors, could produce drama>cally different performance or results. We do not undertake to update any informa>on, data or computa>ons contained in this document, or to communicate any change in the opinions, limits, requirements and es>mates expressed herein. Investors considering purchasing a Fannie Mae security should consult their own financial and legal advisors for informa>on about such security, the risks and investment considera>ons arising from an investment in such security, the appropriate tools to analyze such investment, and the suitability of such investment in each investor's par>cular circumstances. Fannie Mae securi>es, together with interest thereon, are not guaranteed by the United States and do not cons>tute a debt or obliga>on of the United States or of any agency or instrumentality thereof other than Fannie Mae.

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