Housing Slump Bites Freddie Mac; Profit Drops 45 Percent

Perhaps shattering the myth that the housing slump won’t affect the GSEs, Freddie Mac today reported that quarterly net income dropped 45 percent in the second quarter. Net income declined to $764 million, or $1.02 a share, from $1.4 billion, or $1.93, a year earlier; revenue dropped 4.8 percent to $2.26 billion. Freddie’s press statement can be found here. In it, CEO richard Syron cites a “weakening” credit market as the core driver of the drop in income. On a conference call, Bloomberg reports Syron was more direct:

“We were not immune to market forces and we continue to take a cautious view toward the housing market,” Syron said in a conference call after the earnings release.

Credit losses took a huge jump, contributing to the drop in quarterly earnings. Freddie said credit-related expenses were $336 million during the second quarter, up sharply from $193 million one quarter ago:

Credit-related expenses, consisting of provision for credit losses and real estate owned (REO) operations expense, were $336 million for the second quarter of 2007, compared to $63 million for the second quarter of 2006. The year-over-year increase primarily resulted from the recognition of a $320 million provision for credit losses during the second quarter of 2007. This increase largely reflects credit deterioration on 2006 and 2007 loan originations that have exhibited higher transition rates from delinquency to foreclosure and higher loan loss severities resulting from slower home price appreciation and higher unpaid principal balances.

Credit losses will likely keep going up as foreclosures continue to increase and home prices actually decline in coming quarters.

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