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Freddie Mac repayment to Treasury finally puts taxpayers on top

CEO says big earnings not likely to continue

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Mortgage giant Freddie Mac will make a $30.4 billion dividend payment to the Treasury by the end of the year, meaning the enterprise will pay round $9 million more in dividends to the government than the $71.3 billion investment received upon entering conservatorship, according to third-quarter earnings.

Consequently, this puts the enterprise one step closer to make taxpayers whole on the large investment in the government-sponsored enterprise since it was put into conservatorship.

Under the Purchase Agreement, the payment of dividends cannot be used to reduce prior Treasury draws. As a result, Treasury still maintains a liquidation preference of $72.3 billion on the enterprise’s senior preferred stock.

The amount of remaining funds available to Freddie under the agreement with Treasury is currently $140.5 billion, and will be reduced by any future draws.

It’s an interesting estimate given that the government-sponsored enterprises continues to post quarterly profits, but still has an I.O.U. to Treasury.

The GSE reported net income of $30.5 billion for the third quarter, significantly up from $5 billion for the second quarter.

The moderate increase in revenue was a direct result of a robust housing market and settlements with three large financial institutions throughout the quarter, explained Freddie Mac executives during a conference call.

However, the executives cautioned that the housing recovery will eventually come to an end and the legal disputes will resolve, meaning robust earnings for the immediate future seem likely, but will eventually taper off as the market continues to correct itself from the housing crisis.

Freddie Mac’s level of earnings in recent periods is not sustainable over the long term, a press release noted, which executives expanded upon in the conference call.

"We also had approximately $900 million of pre-tax income resulting from the settlement of repurchase claims with three large financial institutions," said CEO Donald Layton. "This is a reminder that this level of earnings, even excluding the [Deferred Tax Asset position], is not sustainable for the long run. In future periods, home price growth will moderate as housing markets reach the end of their recovery cycle and outstanding legal disputes related to legacy assets will have been resolved."  

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