Mortgage repurchaser Freddie Mac posted $550 million in losses in the third quarter, and expects to remain in the red during the fourth quarter, the company said today.
The losses were attributed to a decline in long-term interest rates, which reversed gains the company made in the first half of the year on derivatives and credit-guarantee assets the company holds to manage risk.
But Freddie Mac officials say the company’s mortgage credit risk remains low, and that residential mortgage debt outstanding should continue to grow in 2007.
During the third quarter, the company’s credit guarantee portfolio grew at an annualized rate of 11 percent, to $1.5 trillion at the end of November, a 43 percent share of the market for government-sponsored enterprise mortgage securitizations. That compares with 45 percent for the same period in 2005 and 41 percent in 2004.
Freddie Mac’s retained portfolio, which remains subject to a voluntary cap, decreased slightly to $704 billion.
The government-sponsored lender’s estimated net income was $2.5 billion for the first nine months of 2006, compared with net income of $1.4 billion for the same period last year.
Long-term interest rates declined by approximately 50 basis points during the third quarter, the company said, leading to a $1.5 billion loss on derivatives and credit-guarantee assets the company holds as a hedge against risk. The losses reversed gains on these investments in the first half of the year and contributed to an estimated net loss of approximately $550 million for the quarter. That compares with net income of $880 million for the third quarter of 2005.
“While our quarterly results reflect the volatility we see quarter-to-quarter in response to movements in interest rates, we remain encouraged with the underlying progress of Freddie Mac’s business,” Richard Syron, Freddie Mac’s chairman and chief executive officer, said in a statement.
Although Freddie Mac faces a “challenging market environment” because of tight yield spreads, funding levels remain “highly attractive,” key interest-rate and credit-risk measures are solid, and the company’s capital levels are strong, Syron said.
The $1.5 trillion in loans Freddie Mac guarantees have a low loan-to-value ratio of 56 percent, and is well diversified nationally, the company said. Although Freddie Mac has been buying more adjustable-rate and nontraditional mortgage products this year, long-term, fixed-rate mortgages continue to make up more than 80 percent of the credit-guarantee portfolio.
Interest-only mortgages represented about 15 of purchases year to date, and accounted for 4 percent of the total credit-guarantee portfolio. Payment-option adjustable loans made up 2 percent of purchases, and comprised 2 percent of the credit-guarantee portfolio.
At the end of the third quarter, the total single-family delinquency rate was 51 basis points, compared with 69 basis points at the end of 2005 and 73 basis points at the end of 2004. The company estimates that net charge-offs through the third quarter of 2006 were $110 million, or 1 basis point of the credit-guarantee portfolio, compared with $82 million, or .8 basis points of the portfolio for the same period in 2005.