Federal Home Loan Mortgage Corporation
) or Freddie Mac's fourth-quarter results had a minimal effect on
its share price. The company reported net income of $8.6 billion,
significantly below the prior-quarter earnings of $30.5 billion.
Notably, the prior-quarter results included benefit for federal
income taxes of $23.9 billion related to valuation allowance
against net deferred tax assets.
Freddie Mac reported pre-tax income of $9.3 billion, up 43.1%
sequentially, reflecting the 9th consecutive quarter of positive
earnings. Results benefited from increased other non-interest
income and derivative gains, partially offset by higher net
impairment expense and reduced benefit for credit losses.
For 2013, net income came in at $48.7 billion, significantly up
from $11.0 billion in 2012. Notably, 2013 results included an
income tax benefit of $23.3 billion, resulting from deferred tax
asset valuation allowance release in the third quarter.
Performance in Detail
Net interest income declined 11.6% sequentially to $3.8 billion.
Net interest yield stood at 0.76%, down 10 basis points
sequentially. The decline reflects reduced higher-yielding
mortgage-related assets. However, non-interest income more than
doubled from the prior quarter to $5.8 billion.
Non-interest expense decreased 32.4% from the prior quarter to
$390 million. The fall in expense was due to the Lehman
bankruptcy settlement. Nevertheless, this was partially offset by
increased real estate-owned (REO) holding period write-downs,
along with reduced disposition gains.
Freddie Mac reported benefit for credit losses of $201 million in
the quarter, compared with $1.1 billion in the prior quarter. The
benefit was driven by $0.8 billion of recoveries from
counterparty settlements though the figure was lower that the
prior quarter due to moderate improvement in national home
Furthermore, segment-wise, on a sequential basis, Investments
segment recorded 83.8% rise in earnings while Single-family
Guarantee and Multifamily segments recorded a fall of 35% and
Based on net worth of $12.8 billion, Freddie Mac's dividend
obligation to the Treasury will stand at $10.4 billion in Mar
2014. Notably, including this dividend obligation, the company's
aggregate cash dividends paid to the Treasury will total $81.8
billion as compared with cumulative cash draws of $71.3 billion
received from the Treasury.
Further, since Jan 1, 2009, Freddie Mac provided $2.2 trillion of
liquidity to the mortgage market, which helped in funding 7.7
million refinancings, 2.0 million home purchases and 1.6 million
units of multifamily rental housing. Moreover, the company helped
about 953,000 borrowers to avoid foreclosure.
During 2013, 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 $5.5 billion in 2013.
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 $1.8 billion in 2013.
Continuing with settlements, in Feb 2014, Freddie Mac entered
into a settlement with Lehman Brothers under which it will get
$767 million for the losses suffered due to the latter's
bankruptcy. Moreover, in 2013, Freddie Mac realized $350 million
in pre-tax income related to the settlement.
Recently, Freddie Mac and FHFA also entered into a litigation
settlement agreement with
) over Freddie Mac's investment in certain PLS. As per the terms
of the deal, Freddie Mac received $625 million, which will be
reflected in its first-quarter 2014 results.
Performance by Peers
Federal National Mortgage Association
) reported fourth-quarter 2013 net income of $6.5 billion, down
26% from $8.7 billion earned in the prior quarter. However, this
was the company's eighth consecutive quarterly profit.
Results were adversely impacted by lower investment income,
partially offset by growth in revenues and credit-related income,
along with lower expenses. The quarterly tailwinds consisted of
an improving credit quality and stable liquidity position.
We believe that Freddie Mac's improving non-interest income and
recent settlements will yield profitability in the coming
quarters. Moreover, enhanced credit quality and prudent expense
management were the other positives. However, decline net
interest income remains a concern.
Currently, Freddie Mac carries a Zacks Rank #3 (Hold). A
better-ranked company in the same sector is
Home Loan Servicing Solutions, Ltd.
) with a Zacks Rank #2 (Buy).
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