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Freddie Mac’s net income falls as it takes first step toward independence

The GSE begins rebuilding capital by keeping the $1.8 billion it was set to pay Treasury

Freddie Mac reported net income fell 37% in the third quarter, but things were still rosy for the nation’s second-biggest mortgage financier because it didn’t have to make the so-called “profit sweep” payment due at the end of the September.

“In the third quarter, Freddie Mac took an important first step toward exiting conservatorship by adding more than $1.8 billion to our total equity, bringing our capital reserve to $6.7 billion,” CEO David Brickman said in the earnings statement released on Wednesday morning. “As we look to the future, we are squarely focused on serving our mission and meeting the milestones necessary to move the company forward.”

When Freddie Mac reported its second-quarter earnings in July it said it would be sending $1.8 billion to the U.S. Treasury, an arrangement ordered by the federal government, which holds about 80% of its shares after seizing the company in 2008. That would have brought its total payments to the government to $119.7 billion, exceeding its original draw during the financial crisis by about $48.1 billion.

But then Mark Calabria, director of the Federal Housing Finance Agency, signed an agreement with Steven Mnuchin, secretary of the Treasury, that allowed Freddie Mac and Fannie Mae to retain up to $45 billion in combined capital as they prepare to leave conservatorship. That meant Freddie could keep the $1.8 billion.

Freddie’s portfolio of single-family guaranteed mortgages totaled $1.96 trillion in the third quarter, up 4.3% from the $1.88 trillion a year earlier. Its portfolio of multifamily guaranteed loans rose 15% to $260 billion. The serious delinquency rate for guaranteed single-family mortgages, meaning loans with payments more than 90 days overdue, declined to 0.61%, while the multifamily rate was near zero, at 0.04%.

Guaranteed fee income was $2.2 billion, including single-family and multifamily, up from $2.1 billion a year earlier. The average guarantee fee was 42 basis points, up from 36 basis points. The so-called g-fee is intended to cover the credit risk and other costs that Freddie Mac incurs when it backs mortgages from lenders and it results in higher mortgage rates for borrowers.

The company posted net interest income of $2.4 billion in the third quarter, compared with $3.3 billion a year earlier.

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