Freddie Posts $4.7bn Net Q2 Loss, Asks Treasury for $1.8bn

Freddie Mac reported a $4.7bn net loss in the second quarter of 2010 (Q210), narrowed from a $6.7bn net Q110 loss. The Federal Housing Finance Agency (FHFA), acting as Freddie’s conservator, will submit a request to draw down an additional $1.8bn through the senior preferred stock purchase agreement with the Treasury Department to cover a net worth deficit at the company. Freddie had a $1.7bn net worth deficit as of the end of the quarter, reflecting a total comprehensive loss of $400m and the dividend payment of $1.3bn to the Treasury on the senior preferred stock. The $400m loss attributable to Freddie reflects accumulated other comprehensive income (AOCI) of $4.3, which partially offset the $4.7bn net loss. “Freddie Mac continues to support the still-fragile housing market by providing America’s families with access to affordable home financing and foreclosure alternatives,” said Freddie CEO Charles Haldeman Jr. “We helped more than 150,000 struggling borrowers avoid foreclosure and provided funding that enabled more than 865,000 American families to buy or rent a home in the first half of 2010 — during which the GSEs again supplied the majority of all the liquidity to the US mortgage market.” Haldeman added: “At the same time, we are promoting sustainable homeownership by helping families buy homes that they can afford and keep for the long term. We recognize that high unemployment and other factors still pose very real challenges for the housing market, and with that in mind, we continue to focus on the quality of the new business we are adding to our book to be responsible stewards of taxpayer funds as we support the nation’s housing market.” Freddie reported higher credit quality of new single-family business due to tightened underwriting standards. The single-family delinquency rate of 3.96% at the end of the quarter was down from 4.13% at the end of the previous quarter. As of June 30, 30% of Freddie’s single-family credit guarantee portfolio consisted of mortgages originated in 2009 and the first half of 2010. The company said these loans have shown better delinquency trends at this stage of their life cycle than loans acquired from 2006 through 2008: Freddie reported net charge-offs of $3.9bn in Q210, or an annualized rate of 0.8% of the total mortgage portfolio. This is up from $2.8bn of 0.56% in the previous quarter. Total non-performing assets were $118.7bn — or 5.9% of the total mortgage portfolio — compared with $11.6bn or 5.8% in the previous quarter. The increase was driven not only by continued weakness in the housing market, but by a backlog at Freddie servicers. Freddie identified a backlog at its servicers related to the processing of foreclosure alternatives like loan modifications and short sales. The backlog resulted in erroneous loan data within the company’s reporting systems, it said. A $5bn provision for credit losses and $3.8bn of derivative losses offset $4.1bn of net interest income in the quarter. The data indicate Freddie was “closer to breakeven operations than it first appears” from the net $4.7bn loss, according to FTN Financial strategist Jim Vogel. “Lower rates brought $3.8b of GAAP derivatives losses that will come back in over time via improved net interest income, while credit losses were amplified by a $900m correction for faulty loan data submitted by servicers in 2009 (out of a total accounting update of $1.2b),” Vogel said in commentary today. “‘Normal’ derivatives erosion should be less than $1b as rate changes balance out over time.” Write to Diana Golobay.