WASHINGTON (Reuters) - Freddie Mac (FMCC.OB) on Thursday posted a record annual profit of $48.7 billion for 2013, triggering another fat dividend that will put taxpayers further into the black for bailing out the No. 2 U.S. mortgage company, but it warned its recent string of eye-popping earnings was unsustainable.
The company reported net income of $8.6 billion in the three months ended December 31, paving the way for a $10.4 billion dividend payment to the U.S. Treasury.
While the profit largely came from a reversal of a tax provision that resulted in a large windfall, Freddie Mac's improved fortunes have leaned heavily on the recovery in the U.S. housing market. But the recovery already appears to be moderating, and the company said that the level of earnings "is not sustainable over the long term."
Freddie Mac and larger sibling Fannie Mae (FNMA.OB) have operated under federal conservatorship since 2008. The companies' preferred shares, which some hedge funds have bought aggressively over the past year, jumped by the most in two months and now stand at their highest levels since September 5, 2008, the last trading day before the government seized them.
After both make their latest dividend payments, taxpayers will have received $202.9 billion for their support, $15.4 billion more than the $187.5 billion provided in bailout funds.
Last week, Fannie Mae reported record annual earnings and said it would ship $7.2 billion to the Treasury, putting taxpayers ahead on its bailout for the first time. Freddie Mac had broken even in the previous quarter.
The two companies, which own or guarantee 60 percent of all U.S. home loans, have been helped by a housing recovery that has lifted prices and kept a lid on defaults. Their return to profitability also let them reverse write-downs of certain tax-related assets, leading to large one-time windfalls.
U.S. home price inflation in 2014 will be nearly half of what it was in 2013, according to a recent Reuters poll. Reduced economic stimulus by the Federal Reserve and a tight supply of homes for sale are expected to slow price gains.
Property values are forecast to rise 6.7 percent this year. In a November Reuters poll, economists had said home values would rise 11.4 percent in 2014.
Freddie Mac affirmed it is seeing a slowdown in the increase of home prices that will affect future earnings.
"The year and quarter were extremely strong," Donald Layton, Freddie Mac's chief executive officer, said on a call with reporters. "These levels of income are not sustainable."
"We generally think we will be profitable, but we could easily have a quarter here and there where we are not," Layton said. "We do not believe we're repeating the sins of the past."
No one expected the two companies to become profitable again so quickly, but when home prices surged in 2012, they were able to recover more money than expected on soured loans.
The duo must now turn over any profits to the Treasury as dividends on the controlling stake the government took when it bailed them out. They cannot repurchase the government's share.
Stakeholders, including Perry Capital LLC and Fairholme Funds Inc., have sued the United States and argue that since Fannie and Freddie are returning profits to taxpayers, the government's stake should shrink. This would benefit private shareholders who would see the value of their shares rise.
A federal judge granted Fairholme a motion to conduct discovery in its lawsuit against the Treasury Department on Wednesday, a ruling that allows the investment firm to seek evidence in its case. The litigation is expected to drag on for years.
Investors view the ruling as a positive development and the recent string of earnings as providing more potential for a recovery on their investment.
Freddie Mac's preferred shares (FMCKJ.OB) rose as much as 7.4 percent to $12.40, their biggest daily gain since January 8 and their highest level since 2008. In afternoon trading, Freddie Mac's preferred stock was up 6.1 percent at $12.25.
Fannie Mae's preferred shares (FNMAS.OB) climbed as much as 11.4 percent to $12.25, similarly the biggest daily gain since January 8 and the highest price since 2008. In afternoon trading, Fannie Mae's preferred stock was up 9.6 percent at $12.05.
FUTURE OF HOUSING FINANCE
The sizable dividend payments have complicated a debate on the companies' future.
To avoid ever having a taxpayer rescue again, the Obama administration and lawmakers on Capitol Hill have vowed to wind down Fannie Mae and Freddie Mac and revamp the housing finance system.
The Senate is working on a bipartisan bill that would ensure a government backstop for the market remains in place in times of crisis, an approach favored by the White House. A Republican-backed bill in the U.S. House of Representatives would limit federal mortgage guarantees more sharply.
The companies don't make loans, but instead buy them from lenders and package them into securities they sell to investors. In doing so, they provide a steady source of mortgage funds.
(Reporting By Margaret Chadbourn; Editing by Nick Zieminski and Jan Paschal)