Freddie Mac (NYSE:FRE) today reported net income of $2.2 billion for 2006, up 4 percent compared to $2.1 billion in 2005. The nation's second-largest GSE also reported a net loss of $480 million in the fourth quarter of 2006, due to interest rate movements during the quarter. Freddie also disclosed that 18 percent of its retained portfolio consists of subprime loan products, holdings that might have driven a significant portion of the GSE's realized fourth quarter losses as the value of subprime credit derivatives fell significantly at the end of last year and into early 2007. Fourth quarter losses As a result of the interest-rate movements in the last quarter, Freddie Mac reported a net loss of $480 million in the fourth quarter of 2006, as realized losses and mark-to-market impacts on the company's credit guarantee portfolio, derivatives and administrative expenses more than offset net interest income and management and guarantee income.
Freddie Mac also reported a decrease in the fair value of net assets attributable to common stockholders, before capital transactions, in the fourth quarter of 2006 of approximately $0.2 billion as the impact of OAS widening, the effect of credit deterioration on the guarantee obligation and administrative expenses more than offset the positive contributions from the company's investment and guarantee activities. Too much subprime? Freddie disclosed that the company's $704 billion retained portfolio included $238 billion of non-agency mortgage-related securities at the end of the year, 96 percent of which were rated AAA or equivalent. Included in this amount were $124 billion of non-agency mortgage-related securities backed by subprime loans, of which more than 99.9 percent were AAA rated. With more than 17 percent of its portfolio holdings in the subprime area, numerous analysts that spoke with HW said the company's holdings within the credit sector drove the fourth quarter loss reported by the mortgage giant. "Merely adjusting the value of their subprime derivative holdings to market value probably led to most of the losses the reported," said one analyst, on the condition that her name not be used. Freddie Mac did not disclose the impact its subprime portfolio holdings had upon overall earnings, however, leaving industry analysts and observers to guess at the potential outcome of the company's stake in the subprime credit industry. In spite of the losses, Freddie said it continues to maintain a capital structure exceeding targets mandated by federal regulators. The company's regulatory core capital was estimated at $36.2 billion, it said, with an estimated $2.6 billion in excess of the 30-percent mandatory target capital surplus set by the Office of Federal Housing Enterprise Oversight (OFHEO). For more information, visit