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Will Freddie Mac (FMCC) Deliver Improved Q2 Earnings?

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Federal Home Loan Mortgage Corporation (FMCC), popularly known as Freddie Mac, is scheduled to report its second-quarter 2014 results on Aug 6.

Freddie Mac’s first-quarter 2014 earnings of $4.0 billion reflected its 10th consecutive quarter of positive earnings. However, it was substantially below the prior-quarter net income of $8.6 billion. Notably, first-quarter results included post-tax legal settlement benefit of $3.4 billion and after-tax derivative losses of $1.6 billion. However, lower net impairment expense was among the positives.

Will Freddie Mac report better year-over-year earnings this time? Let’s see how things have shaped up for this announcement.

Factors to Influence Q2 Results

The company doesn’t expect maintaining the earnings level it achieved in the past few quarters. First-quarter results have benefited from a significant rise in housing prices while the 2013 financial results were substantially supported by release of the deferred tax asset valuation allowance. But housing prices remained soft beginning second-quarter 2014 which may adversely impact net income.

During the second quarter, Freddie Mac along with its conservator – Federal Housing Finance Agency (‘FHFA’) – reached settlements with The Royal Bank of Scotland Group plc (RBS), Barclays PLC (BCS) and First Horizon National Corp. (FHN). These settlements relate to the 18 PLS (private-label securities) lawsuits that FHFA filed in 2011. We believe such settlements will contribute to the company’s net income to some extent.

On the other hand, earnings may be negatively impacted by reduction in Freddie Mac’s mortgage-related investments portfolio. The reduction is as per the requirement of FHFA and the Purchase Agreement with the Treasury.

Freddie Mac currently holds a Zacks Rank #2 (Buy).

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