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Freddie Mac records strong third quarter

Freddie Mac posted its strongest earnings report in more than a year in the third quarter ended Sept. 30 and will return $2.3 billion to the U.S. Treasury.

The government-sponsored enterprise (GSE) reported net and comprehensive income of $2.3 billion for this past third quarter, which was up from the $1 billion in net income and $1.1 billion in comprehensive income in the second quarter. It was the strongest report since second-quarter 2015, when the company returned $3.9 billion to taxpayers.

Freddie earnings“It was another very solid quarter for Freddie Mac, both in terms of financial results and business results,” Chief Executive Officer Donald Layton said during a morning conference call with reporters.

“The year is wrapping up nicely, and we continue to feel good about our progress and our momentum going into 2017,” he continued.  

Layton said earnings were boosted by a strong home-purchase market and lower interest rates after Britain’s Brexit decision in June to leave the European Union, which drove a surge in mortgage refinances.

“Purchase volumes were very strong this quarter, up nearly 30 percent, to $116 billion, from the second quarter,” Layton said. “In fact, resurging refi volume, driven by post-Brexit declines in mortgage rates, helped make it our biggest quarter since late 2013.”

Layton said the earnings also were less affected by movements in spreads and interest rates, which have caused volatility on paper in the earnings reports, but have not necessarily reflected the performance of the enterprise.

The strong third quarter could quiet calls for Freddie’s regulator, the Federal Housing Finance Agency (FHFA), to recapitalize the government-sponsored enterprises, at least through the end of the Obama administration.

The larger of the two GSEs, Fannie Mae, is scheduled to release its earnings later this week, on Thursday.

By agreement with the government, all of the GSEs’ profits are swept up by Treasury. Numerous groups on the left and right have called on the FHFA to allow Fannie and Freddie to retain earnings to avoid unpopular draws on the Treasury, which are often characterized as “taxpayer bailouts.”

Freddie and Fannie’s capital reserves are scheduled to be wound down to  zero by 2018. However, both the GSEs can potentially take billions in draws on the Treasury in the event of quarterly losses.

Last month, the Congressional Budget Office released a report that indicated that if Fannie and Freddie were allowed to retain up to $5 billion in profits annually for the next decade, it would help stabilize the mortgage market marginally, but also significantly reduce the chances that the GSEs would have to take draws from Treasury.

Freddie posted a loss in the first quarter of this year and also third-quarter 2015, but did not have to take draws.  

Including this most recent dividend payment of $2.3 billion, Freddie has returned more than $100 billion to Treasury, which is around $30 billion more than it has drawn. Freddie was bailed out by the government in 2008 and placed into conservatorship.

Freddie can draw up to $140 billion from Treasury in the event of losses. Layton said that would be more than enough to cover losses in a catastrophic downturn.  

Layton noted, however, that the enterprise is exploring ways to avoid the accounting discrepancies that causes volatility in its earnings statements, so it can avoid future draws that would “come under significant scrutiny”  from the public.  


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