Freddie Mac today said it expects to report a third quarter 2006 net loss of approximately $550 million, compared to net income of $880 million during the third quarter one year ago. The loss would be within analyst expectations. The GSE also said it expects to report a loss for the fourth quarter, although company officials did not specify expected fourth quarter results.
The company attributed its projected third and fourth quarter losses to market conditions, noting that during the third quarter of 2006, long-term interest rates declined by approximately 50 basis points. As a result, Freddie said its third quarter 2006 results reflect a reversal of mark-to-market gains on derivatives and credit guarantee assets and obligations recognized in the first half of the year. The company also estimated that its net income would amount to $2.5 billion for the first nine months of 2006, compared to $1.4 billion for the first nine months of 2005. "While our quarterly results reflect the volatility we see quarter-to- quarter in response to movements in interest rates, we remain encouraged with the underlying progress of Freddie Mac's business," said Richard F. Syron, chairman and chief executive officer. "We face a challenging market environment due to continued tight spreads. However, our credit guarantee portfolio continues to grow, funding levels remain highly attractive, key interest-rate and credit risk measures are solid and our capital levels are strong. Our underlying markets continue to grow strongly, and we remain sharply focused on continuing to serve our vital mission of strengthening America's housing finance system. At the same time, there is significant uncertainty about the prospects for legislative and regulatory changes. While a number of these changes could have negative implications going forward, at this point there can be no certitude about their potential impact on our economic performance." The GSE also said that it expects to release full financial results for 2006 before the end of the first quarter, although it won't resume regular quarterly reporting until the back half of this year. "Freddie Mac is making solid progress on a series of initiatives to improve the company's controls environment and financial reporting systems," said Buddy Piszel, executive vice president and CFO. "These efforts, under our comprehensive plan, are aimed at returning Freddie Mac to timely financial reporting and building the capabilities we need to continue to evolve our business and seize new opportunities in the future." McLean, Va.-based Freddie Mac disclosed in June 2003 that it had misstated earnings by some $5 billion — mostly underreported — for 2000-2002 to smooth out volatility in profits and uphold its image on Wall Street as a steady performer.