Freddie Mac Reports Disappointing Q4 Earnings, Shares Down - Analyst Blog

Shares of Federal Home Loan Mortgage Corporation ( FMCC ) or Freddie Mac fell 5.30% following disappointing fourth-quarter 2014 results. Though the company reflected its 13th consecutive quarter of positive earnings, net income of $0.2 billion was down from $2.1 billion in the prior quarter.

Results were negatively impacted by reduced settlement income and increased derivative losses. Freddie Mac reported pre-tax income of $0.2 billion, significantly down from the prior quarter.

For 2014, Freddie Mac reported net income of $7.7 billion as compared with $48.7 billion in 2013.

Performance in Detail

Net interest income decreased 2.7% sequentially to $3.6 billion. Net interest yield stood at 0.74%, down 3 basis points sequentially. Decreased balances of higher-yielding mortgage-related assets due to continued liquidations aided the decline. Derivative losses were $3.4 billion, up from $0.6 billion in the prior quarter, mainly due to decreased long-term interest rates and flattening of the yield curve.

Further, non-interest expense came in at $2.6 billion compared with income of $0.8 billion in the prior quarter. Non-interest expense remained stable as compared with the prior quarter at $0.8 million.

Freddie Mac reported provision for credit losses of $17 million in the quarter, compared with $0.6 billion in the prior quarter.

Furthermore, segment-wise, on a sequential basis, Single-family Guarantee recorded a rise of more than 100% in earnings while Multifamily segment's earnings fell 25%. Investments segment reported a loss.

Based on net worth of $2.7 billion (including capital reserve of $1.8 billion), Freddie Mac's dividend obligation to the Treasury will stand at $0.9 billion in Mar 2015. Notably, including this dividend obligation, the company's aggregate cash dividends paid to the Treasury will total $91.8 billion.

Further, since Jan 1, 2009, Freddie Mac provided $2.5 trillion of liquidity to the mortgage market, which helped fund 11 million single-family homes and 2 million units of multifamily rental housing. Moreover, the company helped about 1.1 million borrowers to avoid foreclosure.

Credit Quality

As of Dec 31, 2014, Freddie Mac's new single-family book (loans acquired after 2008, excluding HARP and other relief refinance mortgages) was 60% of the UPB of Freddie Mac's single-family credit guarantee portfolio, while HARP and other relief refinance loans accounted for 20% of the portfolio.

Further, Freddie Mac's 2005-2008 legacy single-family book continued to decline. As of Dec 31, 2014, the book represented 13% of the portfolio.

Our Viewpoint

Though Freddie Mac suffered losses during the crisis of 2008-2009 and had to be bailed out by the government, it managed to turn itself into a profitable organization supported by stable recovery in the housing market.

We believe that Freddie Mac's settlements will yield profitability in the coming quarters. However, lower net interest income and derivative losses were a concern.

Currently, Freddie Mac carries a Zacks Rank #3 (Hold).

Competitive Landscape

Federal National Mortgage Association ( FNMA ) or Fannie Mae reported fourth-quarter 2014 net income of $1.3 billion, down 66.7% sequentially. The huge earnings decline led to negative market sentiment despite the government backed mortgage financier delivering its 12th consecutive quarterly profit.

Some finance companies worth considering include Chemical Financial Corporation ( CHFC ) and MidWest One Financial Group, Inc. ( MOFG ). Both carry a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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