Freddie Mac: No Draw on Treasury for Now, But. . .
Now the bad news: Freddie Mac reported a net loss of $354 million for the first quarter following a net profit of nearly $2.2 billion in Q4. Not only that, but Q1 marked the second time in the last three quarters that Freddie Mac suffered a net loss; for the third quarter of 2015, the net loss was $475 million.
Taxpayers can breathe a sigh of relief after receiving the news that Freddie Mac will not need a draw on Treasury following widespread speculation in the previous week or so that Freddie Mac would need another draw due to the GSEs’ dwindling capital buffer, which is currently $1.2 billion.
However, while not needing a draw on Treasury, Freddie Mae will not be making any dividend payments to Treasury for Q2 2016 (the dividend payment for Q1 was $1.7 billion based on Q4’s net profit of $2.2 billion). Freddie Mac’s total cumulative dividend payment to Treasury since 2008 is $98.2 billion, or $26.9 billion more than the $71.2 billion bailout that Freddie Mac took in 2008. Freddie Mac has not taken a draw on Treasury since 2012; they did not need one after taking nearly a half billion dollar net loss in Q3 last year.
The $354 million net loss for Freddie Mac in Q1—a decline of $2.5 billion from the previous quarter—was primarily driven by two market-related items, according to Freddie Mac:
- The effect of net declining net interest rates, which resulted in an after-tax estimated fair value loss of $1.4 billion for Q1 (compared to an estimated fair value gain of $0.3 billion for Q4 2015 after an increase in interest rates); and the use of derivatives, which Freddie Mac uses as a hedge against changes in interest rates. The value of interest rate derivatives can fluctuate dramatically, however.
- The spread change effect: An estimated after-tax loss of $0.6 billion for Q1 (compared to an estimated loss of $0.3 billion for Q4) due to spreads on certain mortgage loans and mortgage-related securities measured at fair value experienced more widening in Q1 than in Q4.
On the positive side, Freddie Mac Transferred a portion of the credit risk on $54 billion of single-family loans, and have now transferred a portion of the credit risk on $440 billion in single-family loans since credit-risk transfer initiatives began in 2013. Also, Freddie Mac’s core (post-2008) book of business, which excludes HARP and other relief refinance loans, increased up to 68 percent of Freddie Mac’s credit guarantee portfolio. Also, Freddie Mac’s management and guarantee fee income has significantly increased in the past two years.
“Freddie Mac’s first quarter business results continued to be strong, reflecting our transformation to be a more competitive company,” Freddie Mac CEO Donald Layton said. “We’re serving our customers better and also more effectively executing on our mission to responsibly support homeowners and renters nationwide. The percentage of our purchases of loans to first-time homebuyers hit a 10-year high and we continue to finance record levels of rental housing. Also, the transfer of mortgage credit risk away from taxpayers, which we pioneered, proved its resiliency through the quarter’s significant financial market distress. While the resulting flight-to-quality decrease in interest rates reduced our GAAP results this quarter, an impact which is non-economic in nature, the fundamentals of our business are very solid and continue to improve.”
Stakeholders in the industry generally did not react to the news of Freddie Mac’s financial results positively like Layton did. Specifically, they were not convinced that another taxpayer-funded bailout is on the horizon.
“Even after Federal Housing and Finance Agency Director Mel Watt joined housing advocates and economists on both sides of the aisle in sounding the alarm, the Treasury Department has inexplicably refused to allow Fannie Mae and Freddie Mac to maintain a capital buffer against losses like the one Freddie reported today—and like every other financial institution must maintain,” said Wade Henderson, president and CEO of The Leadership Conference on Civil and Human Rights. “We are inevitably headed toward a path of yet another taxpayer-funded bailout, which should be unthinkable eight years after the financial crisis, and which is even worse because it appears to be by design.”
Tim Pagliara, Executive Director of Investors Unite—a coalition of more than 1,500 private investors committed to preserving the rights of GSE shareholders, stated: “By stripping Fannie Mae and Freddie Mac of 100 percent of their profits every quarter since 2012, the Treasury Department put taxpayers on the hook for any future losses by either of the companies, and we’re now seeing this play out in real-time. It’s time to reverse the sweep and to protect the taxpayers by allowing these companies to begin rebuilding capital.”