Freddie Mac reports profit of $524M in first quarter

Marks fourteenth consecutive quarter of positive earnings

Freddie Mac reported net income of $524 million for the first quarter of 2015, compared to $227 million for the fourth quarter of 2014.

The company also reported comprehensive income of $746 million for the first quarter of 2015, compared to $251 million for the fourth quarter of 2014.

“Our strong business momentum from last year carried into the first quarter, enabling us to again produce earnings despite a continued declining rate environment, so we can return further dividends to taxpayers,” said Donald Layton, chief executive officer for Freddie. “We continue to focus on serving our growing customer base better to support the U.S. economy, innovating to become a more competitive company, and reducing risk to the taxpayer.

“We are also working under FHFA leadership to make the industry stronger, with a growing focus on responsibly increasing access to affordable housing for the nation’s borrowers and renters,” Layton said.

First-quarter 2015 net income and comprehensive income increased from the fourth quarter of 2014 by $297 million and $495 million, respectively.

These increases were primarily driven by lower derivative losses as interest rates declined and the yield curve flattened less in the first quarter of 2015 compared to the fourth quarter of 2014.

Additionally, Freddie Mac reclassified certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale in the first quarter of 2015. This reclassification resulted in a benefit for credit losses, offset by lower other non-interest income and higher non-interest expense.

Based on Freddie Mac’s net worth of $2.5 billion at March 31, 2015, less the $1.8 billion capital reserve, the company’s June 2015 dividend obligation to Treasury under the Purchase Agreement will be $746 million, bringing total cumulative cash dividends paid to Treasury to $92.6 billion. The liquidation preference of the senior preferred stock held by Treasury remains $72.3 billion at March 31, 2015, as dividend payments do not reduce prior Treasury draws.

Freddie Mac’s financial results continued to be subject to significant earnings and net worth variability from period to period, which may not necessarily reflect the underlying economics of the company’s business.

Freddie said that gains and losses on the company’s derivative portfolio include both derivative fair value changes and derivative interest carry. Derivative interest carry (i.e., accrual of periodic settlements) represents the net amount the company accrues for interest-rate swap payments it will make or receive during a period – economically equivalent to interest expense.

Here are the highlights:

  • Net interest income, which includes guarantee fees, continued to drive the company’s financial results, partially offset by timing-related losses from derivative fair value changes
  • Net interest income was $3.6 billion. Guarantee fees accounted for approximately 40% of the company’s net interest income in the first quarter 
  • Derivative losses were $2.4 billion, of which $1.8 billion was related to fair value changes. The company’s use of derivatives reduces exposure to interest-rate risk on an economic basis (duration gap continues to average zero months); however, this can result in significant accounting volatility during any given period. Business Fundamentals were strong and continued to improve in First Quarter 2015 
  • Single-family post-2008 book of business continued to grow and was 61% of single-family credit guarantee portfolio at March 31, 2015; HARP and other relief refinance loans represented an additional 20% 
  • Reduced legacy risk from the mortgage-related investment portfolio through sales of $4.1 billion of less liquid assets (including sales of approximately $300 million in UPB of seriously delinquent single-family loans) in the first quarter of 2015. Freddie Mac expects to settle its largest sale of nearly $1.0 billion in UPB of seriously delinquent single-family loans in the second quarter of 2015 
  • Delinquency rates continued to decline and remained below industry benchmarks at March 31, 2015
  • Single-family serious delinquency rate was 1.73%, compared to 2.20% at March 31, 2014

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