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)