Freddie Mac’s profits are not pulling in the same results as its counterpart Fannie Mae, in addition to results being drastically lower than a couple years ago.

The significant drop has caused industry concern that it may be headed for another draw on Treasury, something both enterprises have avoided since 2012. Indeed, just last month the Wall Street Journal ran an article citing Freddie's results and quoting the CEO of Fannie, as reason behind the speculation.

Freddie Mac posted net income of $7.7 billion for the full-year 2014, compared to $48.7 billion for the full-year 2013. Freddie’s 2014 net income and comprehensive income declined from 2013 by $41 billion and $42.2 billion, respectively. 2013 results 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.

On the other side, Fannie Mae reported annual net income of $14.2 billion and annual comprehensive income of $14.7 billion in 2014. This compares to net income of $84.0 billion and comprehensive income of $84.8 billion in 2013, which included the release of the company’s valuation allowance against its deferred tax assets.

More recently, the Urban Institute Senior Fellow Jim Parrott address the rumors in a new report: “What to make of the dramatic fall in GSE profits.”  

Parrott explained that the GSEs require a draw when their losses exceed their capital buffer, posing the questions: How likely is a Freddie draw?

He cited three things that should work to decrease the likelihood of a draw in the coming quarters:

  1. Freddie will likely see a reversal of the accounting losses on its derivative position as interest rates rise.
  2. Freddie will have a still-significant portfolio for next couple of years.
  3. Freddie’s older loans, which have lower guarantee fees, will gradually be replaced by newer ones with higher fees. As long as Freddie retains a dominant market share, this shift toward more high-fee loans will mean an increase in revenues.

As a note of caution, Parrott said that things will get trickier in the out years as the private-label securities market finally comes back and whether or not Freddie will finally open up its credit box.

So what if it does happen?

Not much, Parrott said, at least not for a while.

“Freddie has a $140 billion line of credit with the Treasury. If and when it draws enough to give investors a sense that Freddie might reach that limit during the lifetime of their investment, investors will begin to demand a discount to cover that risk,” said Parrott.

If this happens, Freddie’s financial situation will get a lot worse, but given the size of the line of credit with the Treasury, it will take some very big draws to get investors to that point.