Freddie Mac Turns Corner to Full-Year Profitability

Freddie Mac's net income increased by 55 percent in the fourth quarter of 2012 primarily due to a decrease in newly delinquent loans and an improvement in home prices.  The company reported net income on Thursday of $4.5 billion compared to $2.9 billion in the third quarter of 2012.

Comprehensive net income in the fourth quarter was $5.7 billion compared to $5.6 billion in the third quarter and for the entire year comprehensive net income was $11.0 billion and comprehensive income was $16.0 billion compared to losses of $5.3 billion and $1.2 billion respectively in 2011.

"In 2012, Freddie Mac significantly improved its financial performance and returned more than $7 billion to America's taxpayers through dividends," said Freddie Mac CEO Donald H. Layton.  "It's clear from our earnings that the housing market has turned a corner and that our work to minimize legacy losses and build a strong new book of business is paying off.

The company's $(0.6) billion provisions for credit losses in the third quarter turned into a $0.7 billion benefit in the fourth quarter.  Provisions for losses narrowed for the entire year to $(1.9) billion from $(10.7) billion in 2011. 

The company will not require a draw from Treasury for the fourth quarter because it had a positive net worth at quarter's end of $8.8 billion.  This reflects $4.9 billion net worth at the end of the third quarter and fourth quarter comprehensive income of $5.7 billion.  The latter is partially offset by the $1.8 billion the company will pay to the Treasury as a dividend on senior preferred stock.   Freddie Mac has not requested a draw from Treasury since the second quarter of 2012 and requested an aggregate $0.3 billion in the first and second quarter of 2012.   

Since the company was placed into conservatorship under the Federal Housing Finance Agency in August 2008 it has paid $23.8 billion in cash dividends to Treasury on the company's senior preferred stock. This represents 33 percent of the company's cumulative draws received under the Purchase Agreement with Treasury. In addition, in September 2012, Freddie Mac began remitting proceeds to Treasury from the 10 basis point guarantee fee increase required by the Temporary Payroll Tax Cut Continuation Act of 2011. The guarantee fees related to this increase totaled $108 million for 2012.

In August 2012 the company signed an agreement with Treasury to replace the fixed 10 percent dividend rate established by its original stock purchase agreement with a net worth sweep dividend and suspended the periodic commitment fees.  Under this amendment which became effective on January 1 Freddie Mac is required to pay dividends to the extent that its Net Worth Amount, as defined in the Purchase Agreement, exceeds the permitted capital reserve. The amount of the permitted capital reserve is $3 billion in 2013 and will be reduced by $600 million each year thereafter until it reaches zero in 2018. The amendment effectively ends the circular practice of taking draws from Treasury to pay dividends to Treasury.  Based on Freddie Mac's Net Worth Amount at December 31, 2012, the company's net worth sweep dividend obligation to Treasury in March 2013 will be $5.8 billion.

Beginning January 1, 2013, the amount of remaining funding available to Freddie Mac under the Purchase Agreement with Treasury is $140.5 billion. This reflects the remaining funding available as of December 31, 2009 of $149.3 billion less the company's net worth of $8.8 billion at December 31, 2012.

Freddie Mac reported that in 2012 it had provided relief financing to 687,000 borrowers through the Home Affordable Refinance Program (HARP) and other relief programs and had refinanced 996,000 borrowers through traditional programs.  The company financed 353,000 home purchases and 436,000 multi-family units.  Through these programs it provided $427 billion in liquidity to the market in 2012.  Freddie Mac's various foreclosure prevention programs reached 169,000 homeowners in 2012.

The credit quality of Freddie Mac's loans have continued to improve although the average LTV of its relief refinance loans jumped from 77 percent in 2011 to 97 percent in 2012 due to enhancements of the HARP program.  HARP loans with LTVs over 125 percent represented 23 percent of the HARP loans purchased by Freddie Mac in 2012.  The average weighted credit score of relief refinances was 740 and was 762 for all other loans.

At December 31, 2012, loans originated after 2008 accounted for 63 percent of the value of Freddie Mac's single-family credit guarantee portfolio and HARP loans represented 11 percent of that portfolio.

Since the beginning of 2008, on an aggregate basis, the company has recorded provision for credit losses of $75.2 billion associated with single-family loans and recorded an additional $3.9 billion in losses on loans purchased from the company's PC trusts, net of recoveries. The majority of these losses are associated with loans originated in 2005 through 2008 and this vintage of loan is an increasingly smaller portion of the company's single-family credit guarantee portfolio. At December 31, 2012, loans originated in 2005 through 2008 represented 24 percent of the company's single-family credit guarantee portfolio, based on UPB, down from 32 percent at December 31, 2011.

The serious delinquency rate in the company's single-family portfolio was 3.25 percent at the end of the fourth quarter compared to 3.37 percent at the end of the third quarter and 3.58 percent on December 31, 2011.   The Mortgage Bankers Association's National Delinquency Survey put the U.S. average serious delinquency rate at the end of the fourth quarter at 6.78 percent.

The multifamily delinquency rate was down to 0.19 percent on December 31, 2012 compared to 0.27 percent on September 30 and 0.22 percent at the end of December 2011.  Freddie Mac said its multifamily delinquency rate reflects the continued improvement in the overall multifamily market and remains low compared to other industry participants.