Freddie Mac Profit Declines on Rates

Mortgage-finance company Freddie Mac said its quarterly profit declined, hurt by lower interest rates and losses from derivatives, and it will send a $933 million dividend payment to the Treasury.

Freddie reported a second-quarter profit of $993 million, compared with a prior-year profit of $4.17 billion and a first-quarter loss of $354 million.

The latest quarter included a $400 million hit tied to a decline in interest rates and a $100 million gain from credit spreads. Losses from derivatives, which Freddie uses to hedge interest-rate risk, were $2.06 billion in the quarter, compared with a gain of $3.14 billion in the same quarter last year.

Amid improvement in the housing market, Freddie saw its serious delinquency rate continue to improve, reaching 1.08%, the lowest level since 2008.

Freddie and mortgage-finance firm Fannie Mae were put into a so-called conservatorship under government control during the 2008 financial crisis.

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 $2.1 billion was more than its capital buffer of $1.2 billion, Freddie will send a $933 million dividend to the Treasury for the quarter. It also didn't need a capital infusion because total equity remained positive, though it declined to $2.13 billion from $5.71 billion a year earlier.

In all, after the quarter's dividend, the company will have sent $99.1 billion to the Treasury, compared with the $71.3 billion infusion it will have 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

August 02, 2016 09:35 ET (13:35 GMT)

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