Freddie Mac Slips Back into Loss Column

by devteam August 10th, 2011 | Share

Freddie Mac released its second quarter financial statementrnon Tuesday and showed dramatically better results than its sister enterprisernFannie Mae.  The smaller of the tworngovernment sponsored enterprises (GSEs) posted a net loss of 2.1 billionrncompared to the $2.9 billion reported Monday by Fannie Mae.  The relative sizes of the two companies makesrnthe size of their respective losses irrelevant, however while Fannie Maernrequested an additional draw from the Treasury of $5.1 billion against arndividend to Treasury of $2.3 billion on the preferred senior stock held by therngovernment, Freddie Mac’s requested draw of $1.5 billion was more than offsetrnby a dividend to Treasury of $1.6 billion.</p

The quarter loss came after a positive net income report inrnthe first quarter of $676 million.  Onernyear ago the company had a net loss of $4.7 billion.  The company paid a divided to Treasury in thernfirst quarter of $1.6 billion and did not request a draw.  Since the company was taken intornconservatorship in August 2008 it has drawn $66.2 billion from Treasury whilernpaying $13.2 billion in dividends.  FanniernMae, in contrast, has required $104.8 billion in government support and hasrnpaid $14.7 billion in dividends.</p

Freddie Mac had net interest income of $4.6 billion duringrnthe quarter which was offset by derivative losses of $3.8 billion; provisionrnfor credit losses of $2.5 billion, and net security impairments of $352rnmillion.  The total comprehensive lossrnconsisted of the $2.1 billion net loss partially offset by other comprehensivernincome of $1.0 billion.  The net interestrnincome in the first quarter of 2011 was $4.5 billion and in the 2nd</supquarter of 2010 it was $4.1 billion.  Provisionsrnfor credit losses in the earlier periods were (2.0) billion and (5.0) billion;rnderivative losses were ($0.4) billion and ($3.8) billion.</p

REO operations expense for the second quarter of 2011 wasrn$27 million compared to $237 million in the first quarter.  The decrease in this expense was primarilyrndriven by an improvement in both REO hold period write-downs and dispositionrnlosses as fair values stabilized during the second quarter.</p

The total comprehensive income of $1.0 billion reported wasrndown from 2.1 billion in the first quarter. rnThe decrease was primarily driven by fair value losses on non-agencyrnsecurities due to widening spreads, partially offset by declining interestrnrates on the company’s agency securities.</p

The company said that its “net income and totalrncomprehensive income can vary significantly from quarter to quarter due tornchanges in fair values as a result of changes in interest rates and mortgagernspreads. ”  The shift from net income forrnthe first quarter of 2011 to a current reported net loss primarily reflects thernimpact of declines in long-term interest rates on the fair value ofrnderivatives.  The shift in totalrncomprehensive income from profit to loss reflects the net loss and the adversernimpact of widening spreads on the fair value of the company’s non-agencyrnavailable-for-sale (AFS) securities.  Thernnet impairment of AFS securities recognized in earnings for the second quarterrnwas #52 million compared to $1.2 billion for the first quarter.  </p

During the second quarter the company provided about $73.4rnbillion in liquidity to the mortgage market, helping to finance over 275,000rnconforming single family loans and nearly 100,000 rental units.  It also provided assistance to 54,000rnstruggling homeowners, successfully providing home retention solutions to 8 outrnof every 10 who applied.  Loanrnmodifications were completed on 31,049 homes compared to 35,158 in the firstrnquarter; 7,981 repayment plans were put in place compared to 9,099, there werern3,709 forbearance agreements compared to 7,678 in Q1, and short sales or deedsrnin lieu were completed on 11,038 properties, up from 10,706.</p

The company feels that the portion of its book of businessrnacquired after 2008 is strong with improved loan-to-value ratios, FICO scores,rnand income verification.  That vintagernnow makes up approximately 46 percent of the company’s single-family creditrnguarantee portfolio.  While loansrnoriginated in 2006 and 2007 are still running delinquency rates of 10.28rnpercent and 11.04 percent respectively, the delinquency rates on loansrnoriginated in the past three years are all under 1 percent.</p

The overall serious delinquency of the single familyrnportfolio as of June 30 was 3.5 percent, down from 3.63 percent at the end ofrnQ1.  The company compares that rate tornthe National Delinquency Survey compiled by the Mortgage Bankers Associationrnwhich put the national rate of serious delinquencies at 8.1 percent at the endrnof March.  One year ago Freddie Mac’srndelinquency rate was 3.96 percent.</p

Non-performing assets totaled $123.9 billion or 6.4 percentrnof the total mortgage portfolio excluding non-Freddie Mac securities at the endrnof June compared to $124.4 billion or 6.4 percent at the end of March.  These totals include $37.2 billion and $33.1rnbillion of modified loans that are now performing or are less than 90 days pastrndue at the June 10 and March 31 dates respectively.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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