(Reuters) - Freddie Mac FMCC.OB reported a third-quarter profit on Tuesday, driven by a U.S. housing market on the mend, and said it was not requesting funds from the U.S. Treasury to stay solvent.
The government's second-largest mortgage funding entity, which said its portfolio of late-paying loans was the lowest in two years, had sufficient income to make a $1.8 billion dividend payment to the Treasury.
Freddie Mac had net earnings of $2.9 billion in the quarter that ended September 30, contrasting a $4.4 billion loss a year earlier.
This is the first time Freddie Mac reported earnings since the U.S. Treasury said it would force Freddie, as well as larger government funding firm Fannie Mae FNMA.OB, to more quickly shrink their mortgage investments and turn over profits to taxpayers.
The government seized both entities in 2008 after their massive mortgage losses threatened the financial system.
Through September 30, Freddie Mac has paid $21.9 billion in cash dividends, or 31 percent of its total draws received from the Treasury.
"The question has been, once we move past housing difficulties, can they remain viable?" until there is an overhaul of the U.S. home funding system, said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
"As they continue to reduce their footprint, they're still producing enough top-line revenue to absorb credit cost increases," he said.
Freddie Mac said its net worth was $4.9 billion as of the end of September, up by $3.8 billion from the end of June. A year ago, Freddie Mac reported a net deficit of $6 billion.
Freddie Mac and Fannie Mae, central to the gradually mending housing market, buy mortgages from lenders and pool them for sale to investors, which in turn frees up additional funds for lenders to make more loans.
"Freddie Mac's strong financial performance this quarter was driven by favorable market conditions, including the continued improvement in the housing market, as well as our ongoing efforts to minimize losses on our legacy book," Chief Executive Donald H. Layton said in a statement.
The mortgage funding firm's holdings of late-paying mortgage loans is at the lowest level in two years, and higher quality loans represent 60 percent of the entity's portfolio, he said.
A year ago, higher-quality loans accounted for half of the portfolio, a Freddie Mac spokesman said.
As of the end of September, loans to borrowers with poor credit quality that Freddie Mac originated in 2005 through 2008 accounted for 26 percent of Freddie Mac's single-family credit guarantee portfolio. A year earlier, those lower-quality loans accounted for 32 percent of the total. (Reporting by Lynn Adler; Editing by Maureen Bavdek and Grant McCool)