The news was all Positive for shareholders, investors, and other stakeholders in Freddie Mac’s Third Quarter Financial Results released on Tuesday—primarily, a net income of $2.3 billion, more than double the previous quarter’s profit of $993 million.
Many eyes in the industry have been cautiously watching the GSEs as their capital buffers continue to shrink, fearing that another draw on Treasury might be needed. FHFA Director Mel Watt, the GSEs’ conservator, gave a speech in February 2016 stating that certain risks would continue to escalate as long as the GSEs remained in conservatorship, namely the reduction of the capital buffers. The capital buffers are required by Congress to be reduced to zero by January 1, 2018.
The GSEs have remained profitable amid speculation that they are sinking, however. Freddie Mac’s net income for the whole year of 2015 totaled $6.4 billion, even after reporting a net loss of $475 million in Q3 last year. Even after reporting a net loss of $354 million in Q1 this year, the second loss totaling more than $350 million in three quarters, Freddie Mac’s net earnings recovered to total $993 million in Q2.
It was strong business fundamentals and market-related gains that drove Freddie Mac’s solid results for the third quarter, according to Freddie Mac CEO Donald Layton. Freddie Mac’s single-family core book (post-2008), which excludes HARP and other refinance loans, grew to 71 percent of the credit guarantee portfolio—an increase of 2 percentage points from Q2 (69 percent). Also, driven by lower mortgage interest rates, Freddie Mac’s purchase volume increased from $91 billion in Q2 up to $116 billion in Q3. Freddie Mac’s serious delinquency rate at the end of Q3, 1.02 percent, was 6 basis points lower than Q2 and was the lowest for Freddie Mac-backed loans since July 2008, immediately before the crisis.
Additionally, Freddie Mac’s multifamily purchase volume in Q3 was $12 billion, bringing the year-to-date total for the first three quarters of 2016 up to $39 billion—15 percent higher than the first three quarters of 2015. Freddie Mac transferred a significant portion of credit risk on $40 billion worth of single-family loans in Q3 and on more than half a trillion dollars worth ($570 billion) since credit risk transfer programs began in 2013.
“Freddie Mac’s improving business fundamentals and competitiveness were strongly reflected in our results this quarter. Volumes were higher, credit quality is at its best in eight years, and legacy assets are continuing to decline,” Layton said. “Investments in technology are bearing fruit both for ourselves and our customers. In particular, due largely to our leadership in credit risk transfer, the new business we’re winning from single-family and multifamily customers poses significantly less risk to taxpayers.”
Freddie Mac’s dividend obligation to Treasury in December 2016 will be $2.3 billion (net worth of $3.5 billion as of September 2016 minus Freddie Mac’s capital reserve amount of $1.2 billion). With that dividend payment, Freddie Mac will have paid $101.4 billion in dividends to Treasury since 2008, approximately $30.1 billion more than the $71.3 billion that Freddie Mac drew from Treasury in September 2008.
Click here to view Freddie Mac’s complete Q3 earnings report.