Mortgage repurchaser Freddie Mac reported a net loss of $480 million in the fourth quarter as it upped provisions for losses and saw the value of its investments decline because of a drop in long-term interest rates.
In their annual report to investors, Freddie execs emphasized that they are not heavily invested in subprime loans. The abrupt turnaround from a $684 million profit earned during fourth-quarter 2005 was an anticipated consequence of falling interest rates, not the quality of its loans.
For the year, Freddie reported profits of $2.2 billion, or $2.84 per share, up from $2.1 billion and $2.75 per share in 2005. Total revenue declined from $5.6 billion in 2005 to $5.2 billion, however, and the increase in profits was largely due to a favorable tax ruling.
The government-sponsored entity managed to grow its credit guarantee portfolio by 10.6 percent, to $1.5 trillion, in 2006, a challenging year for lenders. As of Dec. 31, Freddie’s $704 billion portfolio of retained loans included $238 billion of nonagency, mortgage-backed securities (MBS), of which $124 billion was backed by subprime loans.
Freddie executives downplayed the risk of those investments, saying 96 percent of its nonagency MBSs were rated AA or higher. The loan-to-value ratio of Freddie’s credit guarantee portfolio stood at 57 percent at the end of the year, compared with 56 percent at the end of 2005.
A “slight credit deterioration” in Freddie’s loan portfolio prompted the company to boost provisions for credit losses to $297 million, and record a $60 million loss on real estate-owned properties.
But Freddie Mac executives announced a plan to repurchase $1 billion in stock, and said the company’s sound finances could allow it to capitalize on the problems now facing subprime lenders. Freddie is developing new products suited to borrowers of limited means, and could be stepping up its financing of loans to that share of the market.
“We are working fairly intensely right now on how we can develop products in the subprime space that are both shareholder and consumer-friendly,” Freddie Mac Chief Executive Officer Richard Syron told investors in a conference call Friday. “Early work on this — we’re doing it on an a pretty accelerated basis — I would say, is promising. There is a space there.”
Patricia Cook, executive vice president of investments and capital markets, said there’s an opportunity for Freddie to step in and finance loans that Wall Street investors are wary of.
“With the dramatic changes that are occurring in the … subprime and even Alt-A market, where liquidity is drying up, I think there’s an opportunity for Freddie Mac to both provide liquidity and take a leadership role on the credit side,” Cook said. “I think the combination of some new products and our ability, given where we stand in credit, to provide some liquidity to the market is a great opportunity for Freddie Mac.”
Freddie estimated that its share of GSE mortgage securitizations was approximately 43 percent in 2006, compared with 45 percent in 2005 and 41 percent in 2004.
The results released Friday were preliminary, as Freddie hasn’t yet caught up with its financial reporting since a 2003 management and accounting scandal forced the company to restate results from years past.
Congress is considering legislation that would strengthen oversight of Freddie and its sister company, Fannie Mae, that may also address concerns that the GSEs have been expanding their lending portfolios in a drive for profit, while neglecting their chartered mission of supporting affordable housing.
That legislation means that Freddie “faces a highly uncertain regulatory environment,” the company said in a press release announcing the release of the annual report. “Freddie Mac believes appropriate GSE oversight legislation would strengthen market confidence and promote the company’s mission, but cannot predict the prospects for the enactment, timing or content of any final legislation.”
Freddie reported its “strongest ever” affordable-housing performance, claiming that nearly 56 percent of the homes financed by the company were affordable to low- or moderate-income families, and that the company financed almost half a million affordable apartments.
Although Freddie met the low- and moderate-income housing subgoals set by the U.S. Department of Housing and Urban Development, it fell short in the “special-affordable” housing subgoal. The goal was 17 percent, and Freddie’s reported results of 16.93 percent are under review by HUD, the company said.
The company estimates that its share of government-sponsored enterprise (GSE) mortgage securitizations for 2006 was approximately 43 percent, compared with about 45 percent in 2005 and about 41 percent in 2004. All-in, Freddie Mac’s 2006 activities provided mortgage funds for approximately 3.3 million families.