Wednesday, November 07, 2012

Lawler on Freddie Mac Results

by Bill McBride on 11/07/2012 03:49:00 PM

From economist Tom Lawler: Freddie Mac: GAAP Net Income $2.9 Billion in Q3, GAAP Net Worth $4.9 Billion at End of Quarter (no additional Treasury Draw); SF REO Down Again

Freddie Mac reported that its GAAP net income “attributable” to Freddie Mac last quarter was $2.9 billion, down just a tad from the previous quarter. GAAP net income “attributable” to common stockholders last quarter was $1.1 billion, with the difference reflecting the $1.8 billion “paid” to Treasury on its senior preferred stock holdings.

Freddie also reported “other comprehensive income” of $2.7 billion (mainly reflecting “spread-tightening” on its non-agency AFS securities), and that its GAAP net worth on September 30th was $4.9 billion, up from $1.1 billion in the previous quarter. As a result, Freddie’s regulator does not need to request another Treasury “draw.”

Freddie Mac said that its internal Freddie’s internal national home price index, which is based on repeat transactions of homes backed by mortgages owned or guaranteed by Freddie or Fannie with state value weights based on Freddie’s SF mortgage book, increased by 1.3% from June to September, and was up 4.3% from last September.

Freddie’s improved “GAAP” income this year vs. last year has been mainly attributable to lower credit losses – mainly lower provision for credit losses, though its REO operations expense is also down – driven by improving home prices. Here is a table showing Freddie’s December 2011 home price forecast (for it’s internal HPI) vs. “actuals” so far this year.

Annualized Growth Rate,
Freddie Mac Home Price Index
 Dec. 2011 Forecast"Actual"

Freddie noted in it’s 10-Q that “(t)he decline in (REO) expense for the 2012 periods was primarily due to improving home prices in certain geographical areas with significant REO activity, which resulted in gains on disposition of properties as well as lower write-downs of single-family REO inventory.”

Beginning next year, Freddie Mac’s dividend payment on Treasury’s senior preferred stock will change in a fashion that makes it impossible for Freddie Mac (or Fannie Mae) to Here is an excerpt from Freddie’s 10-Q.
“We currently pay cash dividends to Treasury at an annual rate of 10%. On August 17, 2012, Freddie Mac, acting through FHFA, as Conservator, and Treasury entered into a third amendment to the Purchase Agreement, that, among other items, changed our dividend payments on the senior preferred stock. For each quarter from January 1, 2013 through and including December 31, 2017, the dividend payment will be the amount, if any, by which our net worth at the end of the immediately preceding fiscal quarter, less the applicable capital reserve amount, exceeds zero. The applicable capital reserve amount will be $3 billion for 2013 and will be reduced by $600 million each year thereafter until it reaches zero on January 1, 2018. For each quarter beginning January 1, 2018, the dividend payment will be the amount, if any, by which our net worth at the end of the immediately preceding fiscal quarter exceeds zero. If the calculation of the dividend payment for a quarter does not exceed zero, then no dividend will accrue or be payable for that quarter.”
As Freddie noted, “(t)his effectively ends the circular practice of Treasury advancing funds to us to pay dividends back to Treasury, and “(a)s a result of this amendment, over the long term, our future profits will effectively be distributed to Treasury.” This change, of course, eliminates the possibility that the GSEs can re-build capital.

CR Note: Freddie's REO declined to 50,913 houses, down from 53,271 in Q2. I'll have more on REO when Fannie reports.