Freddie Mac recorded a net loss of $475 million for the third quarter of 2015, significantly down compared to net income of $4.2 billion for the second quarter of 2015.
The company also reported a comprehensive loss of $501 million for the third quarter of 2015, compared to comprehensive income of $3.9 billion for the second quarter of 2015.
“For the first time in four years, Freddie Mac had a net loss in the most recent quarter,” said Donald Layton, CEO.
“This $0.5 billion loss was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked-to market but many of the assets and liabilities being hedged are not.”
As a result, the difference between GAAP reporting and the actual underlying economics, which has created significant GAAP income volatility in quarterly financial statements, reduced the after tax earnings in the quarter by an estimated $1.5 billion as interest rates declined significantly.
Layton noted that is the complete opposite result of the prior quarter, which had a $1.5 billion positive contribution to earnings as rates rose significantly.
"Otherwise, the business had very strong fundamentals with growing volumes of guarantees and continued improving credit quality in the guarantee businesses,” said Layton.
Freddie's single-family rental business' purchase volume rose approximately $90 billion, or nearly 50% compared to the same period a year ago.
Additionally, Freddie reported a net worth of $1.3 Billion, with no draw request or dividend obligation under the purchase agreement.
The company has returned $96.5 billion to taxpayers and drawn $71.3 billion from the Treasury.
Layton added, “As this loss was just a fraction of the $1.8 billion net worth reserve we have under the Preferred Stock Purchase Agreement, no U.S. Treasury draw was needed, so total dividends paid remains unchanged at $96.5 billion, $25 billion more than we have received.”
However, the news doesn't come as too much of a surprise to Federal Housing Finance Agency Director Mel Watt.
Watt gave the following comment:
“Freddie Mac’s strong business results in the 3rd quarter were more than offset by losses associated with managing the company’s interest rate risks. This resulted in an overall quarterly loss that was not due to a decline in credit quality or an increase in credit related losses. Freddie Mac’s financial disclosures have consistently highlighted how accounting rules and changes in interest rates could negatively affect their quarterly earnings. Freddie Mac continues to fulfill its obligations to support the housing finance market and provide liquidity and access to mortgage credit. However, as both Enterprises continue to reduce their retained portfolios and transfer credit risk away from the taxpayers to the private sector, these activities will also reduce their revenues. Volatility in interest rates coupled with a capital buffer that will decline to zero in 2018 under the terms of the Senior Preferred Stock Purchase Agreements with Treasury will likely make both Enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws going forward.”
Along the same line, a spokesperson for the U.S. Treasury said, “Freddie Mac’s reported quarterly earnings loss is accounting driven and does not reflect a deterioration in the underlying health of its business. Nevertheless, the prospect of any material losses by the GSEs is another reminder that comprehensive housing finance reform is necessary. Taxpayers remain on the hook for losses incurred by the GSEs, whether through the capital buffer or the ongoing, $258 billion backstop under the PSPAs.”
U.S. Rep. Ed Royce, R- Calif., tied the news back to his bill on limiting the pay of GSE CEOs, saying, “Losses like this combined with multimillion dollar CEO salaries at the GSEs are the warning shots of a return to the pre-crisis model of private gains and public losses that wrecked the economy. We can't simply put the blinders on and say that Fannie and Freddie are just like other companies when taxpayers are on the hook if they go in the red."
The vote on the bill is tentatively scheduled for the week of Nov. 16, according to the office of Royce, R- Calif., who authored the House’s Equity in Government Compensation Act of 2015.
Royce’s bill, and a companion bill in the Senate, would cap the GSE CEOs' pay at its current level, which is $600,000, instead of the $3 million raises that were awarded to Mayopoulos and Layton earlier this year by the Federal Housing Finance Agency.