Freddie Mac Posts Dismal Q2 Earnings, Expenses Down Q/Q

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Federal Home Loan Mortgage Corporation (FMCC) or Freddie Mac’s second-quarter 2014 results had a minimal effect on its share price. Though the company reflected its 11th consecutive quarter of positive earnings, net income of $1.4 billion was below the prior-quarter earnings of $4 billion.

Results were negatively impacted by reduced income from legal settlements associated with private label securities (PLS.TO). Yet, the negatives were partially offset by the benefit for credit losses.

Freddie Mac reported pre-tax income of $2 billion, down 65.5% sequentially.

Performance in Detail

Net interest income remained flat sequentially at $3.5 billion. Net interest yield stood at 0.73%, up 1 basis point sequentially. Derivative losses were $1.9 billion, down from $2.4 billion in the prior quarter, mainly due to reduced losses as the yield curve flattening lessened compared to the prior quarter.

Further, non-interest loss came in at $1.4 billion compared with income of $3.1 billion in the prior quarter. Non-interest expense decreased slightly from the prior quarter to $0.7 million.

Freddie Mac reported benefit for credit losses of $0.6 billion in the quarter, compared with a provision of $0.1 billion in the prior quarter. The benefit was primarily driven by reduced loss severity as recoveries on distressed property dispositions improved.

Furthermore, segment-wise, on a sequential basis, Single-family Guarantee and Multifamily segments recorded a rise of 100% and 25% in earnings, respectively, while Investments segment reported a fall of 90.9%.

Based on net worth of $4.3 billion, Freddie Mac’s dividend obligation to the Treasury will stand at $1.9 billion in Sep 2014. Notably, including this dividend obligation, the company’s aggregate cash dividends paid to the Treasury will total $88.2 billion as compared with cumulative cash draws of $71.3 billion received from the Treasury through Jun 2014.

Further, since Jan 1, 2009, Freddie Mac provided $2.3 trillion of liquidity to the mortgage market, which helped in funding 7.9 million refinancings, 2.3 million home purchases and 1.7 million units of multifamily rental housing. Moreover, the company helped about 1 million borrowers to avoid foreclosure, which included 64,000 in first-half 2014.

Credit Quality

As of Jun 30, 2014, Freddie Mac’s new single-family book (loans acquired after 2008, excluding HARP and other relief refinance mortgages) was 56% of the UPB of Freddie Mac’s single-family credit guarantee portfolio, while HARP and other relief refinance loans accounted for 21% of the portfolio.

Further, Freddie Mac’s 2005-2008 legacy single-family book continued to decline. As of Jun 30, 2014, the book represented 15% of the portfolio and recorded 81% of the company’s single-family credit losses during first-half 2014.

Recent Settlements

During second-quarter 2014, Freddie Mac and the Federal Housing Finance Agency (:FHFA) entered into agreements with a number of firms for settling litigations related to Freddie Mac’s investment in certain PLS. These settlements increased the company’s pre-tax income by $0.4 billion in the quarter.

Further, Freddie Mac entered into deals with many of its sellers to resolve certain representation and warranty claims in lieu of one-time cash payments. Notably, these agreements had a minimal effect on the results.

Our Viewpoint

We believe that Freddie Mac’s recent settlements will yield profitability in the coming quarters. Moreover, enhanced credit quality was the other positive. However, non-interest loss was a concern.

Currently, Freddie Mac carries a Zacks Rank #2 (Buy). Other companies in the same sector worth considering include Home Loan Servicing Solutions, Ltd. (HLSS), Hercules Technology Growth Capital, Inc. (HTGC) and PennyMac Financial Services, Inc. (PFSI). All three carry a Zacks Rank #2.

Read the Full Research Report on FMCC
Read the Full Research Report on HTGC
Read the Full Research Report on HLSS
Read the Full Research Report on PFSI


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