03 May 2012

Freddie Mac Wants More Money

Story first appeared in The Wall Street Journal.

Freddie Mac, the government-controlled mortgage financier, posted a profit of $577 million in the first quarter and will request another helping of government aid to help sustain its operations.

The company's first-quarter profit fell from $676 million a year earlier, it said Thursday, driven in part by larger derivative losses, which totaled $1.06 billion, up from $427 million a year earlier and $766 million in the previous quarter.

However, its provision for credit losses fell to $1.83 billion, down from $1.99 billion a year earlier and $2.58 billion in the fourth quarter due to slowdown in loans deemed seriously delinquent.

Freddie and sister company Fannie Mae don't lend to consumers; rather, they buy mortgages from banks and securitize them for purchase by investors, allowing lenders to continue making loans to consumers.

The companies were put into government conservatorship in 2008 as the housing-market collapse drove a surge in losses at the companies. Since then they have stayed afloat through several infusions of taxpayer money.

Freddie said it will request another $19 million in government aid to offset a net deficit it incurred after paying $1.81 billion in dividends to the Treasury Department. Those payments surpassed the $1.79 billion in total comprehensive income in the quarter, which increased 18.8% from the fourth quarter thanks to rising values for its available-for-sale mortgage securities.

Including its most recent request from the U.S. Treasury Department, it has borrowed more than $72 billion and paid back more than $18 billion in dividends.

Fannie, which in February said it was requesting another $4.6 billion from the government, has borrowed more than $116 billion and paid back $19.6 billion in dividends.

Freddie saw improvement in its credit-quality during the quarter. The rate of single-family loans deemed seriously delinquent was 3.51%, down from 3.58% in the fourth quarter, though it said the rate remains at elevated levels because of weak home prices and extended foreclosure timelines.

But the net charge-off rate for its mortgage portfolio increased to 0.68% from 0.6% a year earlier and 0.65% in the fourth quarter, and its percentage of non-performing assets also rose, to 6.8% from 6.4% a year earlier and flat with the previous quarter.

It also saw a jump in requests for lenders and mortgage servicers to buy back loans that breached its representation and warranty requirements. Such requests were $3.2 billion based on the unpaid principal balance of the loans as of March 31, up from $2.7 billion at the end of the year.

About $1.2 billion of the most recent amount outstanding were the result of mortgage insurers rescinding coverage or denying claims, Freddie said. However, it said the volume of new requests it issued declined to $2.63 billion from $2.8 billion a year earlier.

The overall uptick comes as Freddie and Fannie deal with the ongoing departure of employees, a trend that has occurred since the companies were put into conservatorship.

Earlier this week Freddie said the employee who oversaw its single-family mortgage business, was leaving the company. He has left to accept an offer to serve as chief operating officer of Citigroup Inc.'s North American mortgage business, the Wall Street Journal reported this week.

The chief executive officers of Freddie and Fannie, have also said they plan to leave the companies this year.

In a regulatory filing in March, Freddie said it identified two material weaknesses in its financial-reporting controls that it blamed partly on increased levels of employee turnover.

In the fourth quarter it experienced a significant increase in the number of control breakdowns related to information technology, which stemmed from ineffective management oversight.

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