Freddie Mac Posts Near-Record Profit in 1Q

freddie mac earnings housing market
Paul J. Richards, AFP/Getty Images
By Margaret Chadbourn

WASHINGTON -- Freddie Mac, the No. 2 provider of U.S. mortgage money, posted its second-largest quarterly profit in company history in the first quarter due to rising home prices, falling mortgage delinquencies and increased refinance activity.

The government-controlled company on Wednesday reported net income of $4.6 billion for the first three months of the year, up from $577 million in the year-ago quarter. It was the company's sixth straight quarter of profits, and the largest since a $5.7 billion gain in the third quarter of 2002.

Freddie Mac, which faced insolvency when it was seized by the U.S. government in 2008, paid $5.8 billion to the U.S. Treasury in the first quarter as a dividend payment under the terms of its government bail-out.

It said it would face another $7 billion payment in June based on its current net worth, and suggested it could record gains in the second quarter on billions of dollars worth of assets it had written down, leading to an even bigger payment.

"The strong rebound in the housing market ... continues to be reflected in our excellent financial performance," Freddie Mac Chief Executive Officer Donald Layton told reporters on a conference call.

"We expect that the housing recovery will continue to bolster our financial performance."

Freddie Mac and its larger rival Fannie Mae, which together own or guarantee about half of U.S. home loans, have been sustained by taxpayer support since September 2008, when they were placed in a government conservatorship.

The two state wards' return to profitability has taken the heat out of efforts to lay a new base for the future of the nation's housing finance system. The Obama administration outlined three broad approaches in 2011, but has stopped short of saying which route it would prefer.
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Lawmakers in Congress, both Democrats and Republicans, think Fannie Mae and Freddie Mac should eventually be wound down. However, there is no agreement about what should take their place or how large a role the government should play in making sure mortgage credit is available.

The companies have drawn $187.5 billion from the Treasury since being seized. Freddie Mac has now paid $29.6 billion in dividends to the Treasury since conservatorship began, while Fannie Mae has paid almost $36 billon.

Fannie Mae, which has yet to post its first-quarter results, reported 2012 net income of $17.2 billion, its largest annual profit ever and the first in six years.

Under new bailout terms that went into place this year, Freddie Mac and Fannie Mae must turn over most of their profits to the government. Previously, the two were required to pay a 10 percent dividend even if they faced a loss and in some quarters, they had to draw on taxpayer funds just to make the payment even if they had a small increase in net income.

Now that both companies are enjoying record or near-record profits, they have become a steady source of revenue. Fannie Mae and Freddie Mac do not make loans, but provide financing to banks and other lenders by purchasing mortgages to either hold or repackage as securities that are sold to investors.

Their return to profitability has allowed them to consider booking gains from so-called deferred tax assets that they had written down, which would increase their net worth and lead to large one-time payments to the Treasury.

Freddie Mac decided in the first quarter not to reverse about $30.1 billion in the write-downs of its deferred tax assets, but it said it would likely reverse the write-down in either the second or third quarters.

The company has certain requirements and thresholds set up with auditors that it must meet before it writing up the assets.

"We could pass that test as early as next quarter," Layton said.

Fannie Mae is weighing whether to reverse a write-down on about $60 billion.

Despite their now steady dividend payments, Fannie Mae and Freddie Mac will never be able to free themselves of government control under the current terms of their bailout, which do not allow them to build equity or purchase the preferred shares the government has taken.

The White House has estimated that taxpayers might end up seeing a $51 billion profit on the federal funds that have been injected into Fannie Mae and Freddie Mac if the two finance companies remain in conservatorship through fiscal year 2023.

(Updated at 12:27 p.m. ET)

9 Numbers That'll Tell You How the Economy's Really Doing
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Freddie Mac Posts Near-Record Profit in 1Q
The gross domestic product measures the level of economic activity within a country. To figure the number, the Bureau of Economic Analysis combines the total consumption of goods and services by private individuals and businesses; the total investment in capital for producing goods and services; the total amount spent and consumed by federal, state, and local government entities; and total net exports. It's important, because it serves as the primary gauge of whether the economy is growing or not. Most economists define a recession as two or more consecutive quarters of shrinking GDP.
The CPI measures current price levels for the goods and services that Americans buy. The Bureau of Labor Statistics collects price data on a basket of different items, ranging from necessities like food, clothing and housing to more discretionary expenses like eating out and entertainment. The resulting figure is then compared to those of previous months to determine the inflation rate, which is used in a variety of ways, including cost-of-living increases for Social Security and other government benefits.
The unemployment rate measures the percentage of workers within the total labor force who don't have a job, but who have looked for work in the past four weeks, and who are available to work. Those temporarily laid off from their jobs are also included as unemployed. Yet as critical as the figure is as a measure of how many people are out of work and therefore suffering financial hardship from a lack of a paycheck, one key item to note about the unemployment rate is that the number does not reflect workers who have stopped looking for work entirely. It's therefore important to look beyond the headline numbers to see whether the overall workforce is growing or shrinking.
The trade deficit measures the difference between the value of a nation's imported and exported goods. When exports exceed imports, a country runs a trade surplus. But in the U.S., imports have exceeded exports consistently for decades. The figure is important as a measure of U.S. competitiveness in the global market, as well as the nation's dependence on foreign countries.
Each month, the Bureau of Economic Analysis measures changes in the total amount of income that the U.S. population earns, as well as the total amount they spend on goods and services. But there's a reason we've combined them on one slide: In addition to being useful statistics separately for gauging Americans' earning power and spending activity, looking at those numbers in combination gives you a sense of how much people are saving for their future.
Consumers play a vital role in powering the overall economy, and so measures of how confident they are about the economy's prospects are important in predicting its future health. The Conference Board does a survey asking consumers to give their assessment of both current and future economic conditions, with questions about business and employment conditions as well as expected future family income.
The health of the housing market is closely tied to the overall direction of the broader economy. The S&P/Case-Shiller Home Price Index, named for economists Karl Case and Robert Shiller, provides a way to measure home prices, allowing comparisons not just across time but also among different markets in cities and regions of the nation. The number is important not just to home builders and home buyers, but to the millions of people with jobs related to housing and construction.
Most economic data provides a backward-looking view of what has already happened to the economy. But the Conference Board's Leading Economic Index attempts to gauge the future. To do so, the index looks at data on employment, manufacturing, home construction, consumer sentiment, and the stock and bond markets to put together a complete picture of expected economic conditions ahead.
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