Federal Home Loan Mortgage Corporation
) or Freddie Mac's first-quarter 2014 results had a minimal effect
on its share price. Though the company reflected the 10th
consecutive quarter of positive earnings, net income of $4.0
billion was below the prior-quarter earnings of $8.6 billion.
Notably, the results included legal settlement benefit of post-tax
$3.4 billion and derivative losses of $1.6 billion after-tax.
Results were negatively impacted by derivative losses, reduced
legal settlement proceeds and elevated income tax expense. These
negatives were partially offset by lower net impairment expense.
Freddie Mac reported pre-tax income of $5.8 billion, down 37.6%
Performance in Detail
Net interest income declined 7.9% sequentially to $3.5 billion. Net
interest yield stood at 0.72%, down 4 basis points sequentially.
The decline reflects reduced higher-yielding mortgage-related
assets. Moreover, non-interest income decreased 46.6% sequentially
to $3.1 billion.
Non-interest expense increased 97.7% from the prior quarter to $771
million. Notably, the prior quarter included benefit of the Lehman
Freddie Mac reported provision for credit losses of $85 million in
the quarter, compared with a benefit of $201 million in the prior
quarter. The provision was driven by $0.5 billion reduction in
recoveries from counterparty settlements.
Furthermore, segment-wise, on a sequential basis, Single-family
Guarantee, Investments and Multifamily segments recorded a fall of
76.9%, 52.2% and 20% in earnings, respectively.
Based on net worth of $6.9 billion, Freddie Mac's dividend
obligation to the Treasury will stand at $4.5 billion in Jun 2014.
Notably, including this dividend obligation, the company's
aggregate cash dividends paid to the Treasury will total $86.3
billion as compared with cumulative cash draws of $71.3 billion
received from the Treasury through Mar 2014.
Further, since Jan 1, 2009, Freddie Mac provided $2.3 trillion of
liquidity to the mortgage market, which helped in funding 7.8
million refinancings, 2.1 million home purchases and 1.7 million
units of multifamily rental housing. Moreover, the company helped
about 987,000 borrowers to avoid foreclosure, which included 34,000
in first-quarter 2014.
As of Mar 31, 2014, Freddie Mac's new single-family book (loans
acquired after 2008, excluding HARP and other relief refinance
mortgages) was 55% of the UPB of Freddie Mac's single-family credit
guarantee portfolio, while HARP and other relief refinance loans
accounted for 21% of the portfolio.
Further, Freddie Mac's 2005-2008 legacy single-family book
continued to decline. As of Mar 31, 2014, the book represented 15%
of the portfolio and recorded 77% of the company's single-family
credit losses during the quarter.
During first-quarter 2014, Freddie Mac and the Federal Housing
Finance Agency (FHFA) entered into agreements with a number of
firms for settling litigations related to Freddie Mac's investment
in certain private label securities (PLS). These settlements
increased the company's pre-tax income by $4.5 billion in the
Further, Freddie Mac entered into deals with many of its sellers to
resolve certain representation and warranty claims in lieu of
one-time cash payments. Notably, these agreements increased the
company's pre-tax income by $0.3 billion.
Performance by Peer
Federal National Mortgage Association
) or Fannie Mae reported first-quarter 2014 net income of $5.3
billion, down significantly from $58.7 billion earned in the prior-
year quarter. However, this was the company's ninth consecutive
quarterly profit. Further, the first-quarter results included a
$4.1 billion revenue flow related to the settlement with
Bank of America Corporation
Results were adversely impacted by lower credit related income and
higher expenses, partially offset by growth in both net revenue as
well as investment income. Further, improvement in credit quality
and a strong liquidity position were the quarterly tailwinds.
We believe that Freddie Mac's recent settlements will yield
profitability in the coming quarters. Moreover, enhanced credit
quality was the other positive. However, decline in the top line
and undisciplined expense management remain concerns.
Currently, Freddie Mac carries a Zacks Rank #5 (Strong Sell). A
better-ranked company in the same sector is
Home Loan Servicing Solutions, Ltd.
) with a Zacks Rank #1 (Strong Buy).
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