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Freddie Mac posts $1 billion profit

Freddie Mac reported solid earnings in the second quarter, posting $1 billion in net income and $1.1 billion in comprehensive income that will result in a $933 million payment to the U.S. Treasury.

The strong quarterly performance could keep the issue of housing-finance reform and the future of the government-sponsored enterprises (GSEs) off the political radar through the presidential election, though Freddie’s chief executive officer told reporters earnings continue to be vulnerable to market volatility.

Data tracking(1)“It was a solid quarter both in terms of financial results and business results,” Freddie Mac CEO Donald Layton said in a morning call with reporters. Freddie’s second-quarter earnings were up from a $354 million net loss and $200 million comprehensive loss in the first quarter of the year, which were largely accounting losses linked to how the GSE hedges against interest-rate risks.

Freddie’s earnings have been volatile in recent quarters, but much of this has been associated with hedging against rate risk in a volatile market and is not revealing of performance. In this past quarter, however, market volatility didn’t have as much of an impact on earnings.

“Without as much market-related noise this quarter, the strong and improving fundamentals of our businesses are more evident,” Layton said.  

Falling rates, however, created some volatility at the end of the quarter. After Britain’s June 23 decision to leave the European Union, interest rates fell sharply. Freddie sustained a roughly $400 million loss as a result of its hedging activities at the end of the quarter.

Freddie’s loan-purchase volume was up significantly in the quarter, however. Layton said the higher volumes were driven by lower rates that have supported the best housing market in a decade.  

Freddie’s single-family purchase volume totaled $91 billion, up by $22 billion from the first quarter. This volume includes home refinances and home-purchase loans acquired by Freddie in the quarter.  

Freddie provided roughly $103 billion in liquidity to the mortgage market in the second quarter, funding nearly 392,000 single-family homes and more than 148,000 multifamily rental units, the company reported. The GSE also transferred to the private sector the lion’s share of the risk on more than $85 billion in loans.

After the September payment to the Treasury, Freddie will have paid $99.1 billion to the Treasury, which is more than its original draw. The government placed Freddie Mac and its larger cousin, Fannie Mae, in conservatorship in 2008, and bailed out the GSEs. Freddie has taken total draws of $71.3 billion.

Despite the strong quarter, the Community Home Lenders Association (CHLA) and Community Mortgage Lenders of America both put out statements saying Freddie and Fannie’s capital buffers should be restored to avoid future draws that might cause a political backlash.

“Today's earnings report shows how contrived the sweep agreement is,” CHLA said. “A loss next quarter just slightly higher than this quarter's gain would result in a Treasury advance — even though they balance each other out. The simple answer is that the GSEs should be able to keep these modest profits in good quarters to balance potential small losses in future quarters," the CHLA statement continued. 

The GSEs capital reserves are scheduled to be wound down to zero at the beginning of 2018, making future draws on the Treasury likely. In the call with reporters, Layton outlined several steps that Freddie has taken to minimize earnings volatility and the need to take future draws. By agreement with the government, Freddie can draw up to $140.5 billion on the Treasury. 


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