Taxpayer Profit Surpasses $10 Billion on Freddie Mac Earnings

By: Jann Swanson •

Freddie Mac posted its ninth consecutive quarter of positive net and comprehensive income on Thursday as well as a substantial profit for Fiscal 2013.  The company reported net income of $8.6 billion for the fourth quarter of 2013 and $48.7 billion for the year.  Comprehensive income for the two periods was $9.8 billion and $51.6 billion.

Comparisons with the prior quarter and prior year are skewed because of the release in Q3 2013 of a $23.3 billion deferred tax asset valuation allowance.  However net and comprehensive income in the third quarter were $30.5 billion and $30.4 billion and in 2012, $11.0 and $16.0 billion.

In addition to the asset valuation allowance, other items that positively impacted Freddie Mac's financial results were:

  • A pre-tax benefit of legal settlements of $6.0 billion in the fourth quarter and $7.7 billion for the full year;
  • Continued improvement in home prices allowing for reduced loan loss provisions (As this levels off, it will mean the pace of recent improvements in earnings will decelerate)
  • Fair value gains on the derivative portfolio and non-agency mortgage related securities.

Net interest income was $3.8 billion for the fourth quarter of 2013, compared to $4.3 billion for the third quarter of 2013 and $16.5 billion for the full year compared to $17.6 billion for 2012.  Net interest yield was 76 basis points for the fourth quarter compared to 86 basis points for the third and 82 basis points for 2013 against 84 basis points for 2012. The decreases in both net interest income and net interest yield were primarily driven by a decline in the balance of higher-yielding mortgage-related assets from continued liquidations, partially offset by lower funding costs.

There was a benefit for credit losses of $201 million for the fourth quarter of 2013, compared to a benefit of $1.1 billion for the third quarter of 2013. The benefit for credit losses in the third and fourth quarters of 2013 was driven by $0.9 billion and $0.8 billion of recoveries from settlements of representation and warranty claims, respectively. Moderation in home-price growth during the fourth quarter led to a smaller benefit for credit losses compared to the third quarter.

There was also a benefit for credit losses of $2.5 billion for the full-year 2013, compared to a provision for expense of $1.9 billion for the full-year 2012. The improvement reflects a decrease in the volume of newly delinquent loans, increases in national home prices, and approximately $1.7 billion in recoveries from representation and warranty settlements during 2013.  Freddie Mac's loan loss reserves were $24.7 billion at year end compared to $25.0 billion as of September 30, 2013 and $30.9 billion at December 31, 2012.

There was a gain of $1.0 billion from derivatives for the fourth quarter of 2013, compared to a loss of $74 million for the third quarter of 2013. Derivative gains were $2.6 billion for the full-year 2013, compared to a loss of $2.4 billion for 2012.

Net impairment of AFS securities recognized in earnings was $1.3 billion for the fourth quarter of 2013, compared to $126 million for the third quarter of 2013 and the 2013/2012 numbers were $1.5 billion and $2.2 billion respectively.

Other non-interest income was $6.1 billion for the fourth quarter of 2013, compared to $1.9 billion for the third quarter of 2013. For the full year other non-interest income was $7.4 billion, compared to $0.5 billion for 2012. The increase primarily reflects settlement proceeds of $5.5 billion related to PLS litigation during the year, $4.3 billion of which occurred in the fourth quarter.  .

Non-interest expense was $390 million for the fourth quarter of 2013, compared to $577 million for the third quarter and $2.1 billion compared to $2.2 billion for the respective years. The decrease was primarily driven by the Lehman bankruptcy settlement, partially offset by higher REO holding period write-downs and lower disposition gains during the fourth quarter.

Freddie Mac's operations consist of three segments, which are based on the type of business activities each performs - Single-family Guarantee, Investments and Multifamily.   For the third quarter and full-year 2013, the All Other category primarily includes the impact of releasing the valuation allowance against net deferred tax assets.

Based on December 31, 2013 net worth of $12.8 billion, the company will pay a divided to Treasury of $10.4 billion in March, bringing the total cash dividends paid since the company was put in federal conservatorship in 2008 to $81.8 billion.  Total draws from Treasury to support Freddie Mac's operations are $71.34 billion.  Treasury continues to hold $72.3 billion in senior preferred Freddie Mac stock as dividend payments do not reduce the company's Treasury debt.  In addition, since September 2012 the company has been remitting to Treasury proceeds from a 10 basis point increase in the guarantee fee mandated by the Temporary Payroll Tax Cut Continuation Act of 2011.  Payments under this requirement totaled $533 million in 2013 and $108 million in 2012.

At December 31, 2013, the company's new single-family book (loans acquired after 2008, excluding HARP and other relief refinance mortgages) accounted for 54 percent of the unpaid principal balance of Freddie Mac's single-family credit guarantee portfolio and HARP and other relief refinance loans represented 21 percent.  The 2005-2008 legacy single-family book continues to represent a declining portion of the company's single-family credit guarantee portfolio; 16 and 24 percent.at the end of 20013 and 2012 respectively.  However, this portion accounted for 81 percent and 87 percent of the company's single-family credit losses in the two periods. 

Single-family serious delinquencies were at 2.39 percent at December 31, 2013, compared to 2.58 percent at the end of Q3 and 3.25 percent at the end of 2012.  This is substantially below the industry rate, placed at 5.41 percent by the Mortgage Bankers Association. The multifamily delinquency rate (60+ days) was 0.09 percent at the end of December compared to 0.05 the previous quarter and 0.19 percent at the end of 2012.

Freddie Mac says it provided $453 billion in liquidity to the mortgage market in 2013 including refinancing 1.6 million homes, providing funds for 515,000 home purchases and 388,000 units of multi-family rental housing.  The company also assisted 168,000 borrowers to avoid foreclosure.