Mortgage-finance company Freddie Mac posted a loss—only its second quarter in the red in the past four years—driven by lower interest rates and increased credit spreads.

Freddie reported a loss of $354 million, compared with a prior-year profit of $524 million and a fourth-quarter profit of $2.16 billion. The company's two recent losses have come in the past three quarters.

The latest quarter included a $900 million hit tied to a larger decline in interest rates and a $600 million loss from widening spreads. Losses from derivatives, which Freddie uses to hedge interest-rate risk, were $4.56 billion in the quarter.

Amid improvement in the housing market, Freddie saw its serious delinquency rate continue to improve, reaching 1.2%, the lowest level in at least four years.

Freddie and mortgage-finance firm Fannie Mae were put into a so-called conservatorship under government control during the 2008 financial crisis, eventually receiving nearly $188 billion in support from the U.S. Treasury.

Under the terms of the bailout, the companies must send nearly all of their profits to the government in the form of dividends and wind down their capital buffers over time.

Because its net worth of $1 billion was less than its capital buffer of $1.2 billion, Freddie won't send a payment to the Treasury for the quarter. It also didn't need a capital infusion because total equity remained positive, though it declined from $2.94 billion a year earlier.

In all, the company has sent $98.2 billion to the Treasury, compared with the $71.3 billion infusion it had received.

Freddie and Fannie have recently been caught between shareholders, civil-rights groups and some small lenders who want to see them freed from government control, a White House that believes the current system is broken, and a Congress that can't come to agreement on what the future system should be.

The price of Freddie's portfolio, as with that of all bonds, rises and falls as interest rates change. The company uses derivatives in an effort to counteract that effect, but because of accounting rules, the derivatives can make large profits or losses appear over short periods.

Over the long term, the impact of the derivatives accounting issue is negligible. But as the capital buffer disappears, the accounting issue could cause Freddie to require an injection of capital from the Treasury.

Fannie and Freddie don't make loans. Instead they buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.

Write to Austen Hufford at austen.hufford@wsj.com

 

(END) Dow Jones Newswires

May 03, 2016 09:45 ET (13:45 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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