Freddie Mac Slips Back into Loss Column
Freddie Mac released its second quarter financial statement on Tuesday and showed dramatically better results than its sister enterprise Fannie Mae. The smaller of the two government sponsored enterprises (GSEs) posted a net loss of 2.1 billion compared to the $2.9 billion reported Monday by Fannie Mae. The relative sizes of the two companies makes the size of their respective losses irrelevant, however while Fannie Mae requested an additional draw from the Treasury of $5.1 billion against a dividend to Treasury of $2.3 billion on the preferred senior stock held by the government, Freddie Mac's requested draw of $1.5 billion was more than offset by a dividend to Treasury of $1.6 billion.
The quarter loss came after a positive net income report in the first quarter of $676 million. One year ago the company had a net loss of $4.7 billion. The company paid a divided to Treasury in the first quarter of $1.6 billion and did not request a draw. Since the company was taken into conservatorship in August 2008 it has drawn $66.2 billion from Treasury while paying $13.2 billion in dividends. Fannie Mae, in contrast, has required $104.8 billion in government support and has paid $14.7 billion in dividends.
Freddie Mac had net interest income of $4.6 billion during the quarter which was offset by derivative losses of $3.8 billion; provision for credit losses of $2.5 billion, and net security impairments of $352 million. The total comprehensive loss consisted of the $2.1 billion net loss partially offset by other comprehensive income of $1.0 billion. The net interest income in the first quarter of 2011 was $4.5 billion and in the 2nd quarter of 2010 it was $4.1 billion. Provisions for credit losses in the earlier periods were (2.0) billion and (5.0) billion; derivative losses were ($0.4) billion and ($3.8) billion.
REO operations expense for the second quarter of 2011 was $27 million compared to $237 million in the first quarter. The decrease in this expense was primarily driven by an improvement in both REO hold period write-downs and disposition losses as fair values stabilized during the second quarter.
The total comprehensive income of $1.0 billion reported was down from 2.1 billion in the first quarter. The decrease was primarily driven by fair value losses on non-agency securities due to widening spreads, partially offset by declining interest rates on the company's agency securities.
The company said that its "net income and total comprehensive income can vary significantly from quarter to quarter due to changes in fair values as a result of changes in interest rates and mortgage spreads. " The shift from net income for the first quarter of 2011 to a current reported net loss primarily reflects the impact of declines in long-term interest rates on the fair value of derivatives. The shift in total comprehensive income from profit to loss reflects the net loss and the adverse impact of widening spreads on the fair value of the company's non-agency available-for-sale (AFS) securities. The net impairment of AFS securities recognized in earnings for the second quarter was #52 million compared to $1.2 billion for the first quarter.
During the second quarter the company provided about $73.4 billion in liquidity to the mortgage market, helping to finance over 275,000 conforming single family loans and nearly 100,000 rental units. It also provided assistance to 54,000 struggling homeowners, successfully providing home retention solutions to 8 out of every 10 who applied. Loan modifications were completed on 31,049 homes compared to 35,158 in the first quarter; 7,981 repayment plans were put in place compared to 9,099, there were 3,709 forbearance agreements compared to 7,678 in Q1, and short sales or deeds in lieu were completed on 11,038 properties, up from 10,706.
The company feels that the portion of its book of business acquired after 2008 is strong with improved loan-to-value ratios, FICO scores, and income verification. That vintage now makes up approximately 46 percent of the company's single-family credit guarantee portfolio. While loans originated in 2006 and 2007 are still running delinquency rates of 10.28 percent and 11.04 percent respectively, the delinquency rates on loans originated in the past three years are all under 1 percent.
The overall serious delinquency of the single family portfolio as of June 30 was 3.5 percent, down from 3.63 percent at the end of Q1. The company compares that rate to the National Delinquency Survey compiled by the Mortgage Bankers Association which put the national rate of serious delinquencies at 8.1 percent at the end of March. One year ago Freddie Mac's delinquency rate was 3.96 percent.
Non-performing assets totaled $123.9 billion or 6.4 percent of the total mortgage portfolio excluding non-Freddie Mac securities at the end of June compared to $124.4 billion or 6.4 percent at the end of March. These totals include $37.2 billion and $33.1 billion of modified loans that are now performing or are less than 90 days past due at the June 10 and March 31 dates respectively.