Freddie Mac Profits Put Taxpayers $91.8 Billion in the Black

By: Jann Swanson •

Freddie Mac said today that full-year net income and comprehensive income, $7.7 billion and 9.4 billion respectively, made 2014 the company's third straight year of profitability.  The financial results were driven primarily by:

  • Net interest income of $14.3 billion
  • Settlement income of $6.1 billion related to private-label securities litigation
  • Derivative losses of $8.3 billion driven mostly by declining interest rates

Net and comprehensive income results were substantially below the numbers booked in 2013 of $48.7 billion and $51.6 billion respectively, totals that included an income tax benefit of $23.3 billion that primarily resulted from the release of the deferred tax asset valuation allowance in the third quarter of   2013. The decreases in 2014 net income and comprehensive income were further driven by:

  • a shift from derivative gains of $2.6 billion in 2013 to derivative losses of $8.3 billion in 2014 primarily due to declining long-term interest rates in 2014;
  • a shift from a benefit for credit losses of $2.5 billion in 2013 to a provision for credit losses of $0.1 billion in 2014 mainly because of lower home-price growth and smaller recoveries from representation and warranty settlements in 2014; and
  • a decrease in net interest income of $2.2 billion because of a continued decline in the company's mortgage-related investments portfolio.

In the fourth quarter net income was $0.3 billion compared to $2.1 billion in the previous three months and comprehensive income declined from $2.8 billion to $0.3 billion.  Freddie Mac said the quarter-over-quarter declines were driven by:

  • an increase in derivative losses of $2.8 billion due to declining long-term interest rates and flattening of the yield curve;
  • a decrease in settlement income of $1.2 billion as there were no private-label securities (PLS) litigation settlements in the fourth quarter of 2014;
  • a decrease in total other comprehensive income of $0.7 billion mostly due to lower fair value gains on non-agency available-for-sale (AFS) securities; partially offset by
  • a shift from income tax expense of $1.0 billion in the third quarter of 2014 to an income tax benefit of $0.1 billion in the fourth quarter of 2014.

"2014 marked another year of solid financial and operating performance for Freddie Mac, enabling us to return an additional $20 billion to the nation's taxpayers," said Donald H. Layton, chief executive officer. "We made tremendous progress in materially reducing taxpayer exposure to risk, increasing market share between the GSEs through improved customer focus and service, and making our operations better through innovation and efficiency. At the same time, working with FHFA we helped to further strengthen the housing finance system in America."

Under its agreement with the U.S. Treasury Freddie Mac will pay a dividend to Treasury of $0.9 billion for its fourth quarter obligation.  This will bring total cumulative cash dividends paid to Treasury to $91.8 billion. The liquidation preference of the senior preferred stock held by Treasury remains $72.3 billion at December 31, 2014, as dividend payments do not offset prior Treasury draws.

Freddie Mac said its single family business segment earned $1.5 billion for the year and $0.5 billion for the fourth quarter.  Its post-2008 book of business now stands at 60 percent of its single-family credit guarantee portfolio with HARP and other relief loans representing an additional 20 percent.  Its 2005-2008 legacy book now represents 13 percent of the portfolio.

The single family serious delinquency rate was 1.88 percent on December 31, 2014 compared to 2.39 percent a year earlier.  This was substantially below the overall industry rate.

The company's investments segment had a comprehensive income of $6.5 billion for the entire year and a $0.5 billion loss in the fourth quarter.  The company's mortgage-related investments portfolio was $408.4 billion at year end,  a decline of $52.6 billion from December 31, 2013, and remained below the December 31, 2014 Purchase Agreement limit of $470 billion.

The Multifamily segment had comprehensive income of $1.5 billion and $0.3 billion for the full-year and fourth quarter of 2014, respectively.  New purchase volume remained strong at $28.3 billion in 2014. A majority of the credit risk on these new multifamily mortgages is transferred to the private market through K-deal offerings.

The company provided financing for over 413,000 rental units in 2014, 90 percent of which are affordable to families earning low to moderate incomes.  It also introduced a new Small Balance Loan offering to provide seller/servicers a dedicated platform to originate and sell loans for smaller rental properties.