* $5 bln profit is second largest in company's history
* Derivatives gain of $1.4 bln due to rising rates
* Still weighing when to book massive gain on deferred tax
By Margaret Chadbourn
WASHINGTON, Aug 7 Freddie Mac, the
U.S.-owned mortgage finance company, on Wednesday said its
second-quarter profit surged 65 percent to $5.0 billion, its
second largest ever, as rising home prices limited credit losses
and it booked big gains on derivatives that benefited from
rising interest rates.
That big profit and another like it expected soon from
larger sister Fannie Mae are fast becoming the centerpiece of
the debate over housing-finance reform, which has languished
since taxpayers stepped in to rescue the pair to the tune of
nearly $188 billion during the financial crisis.
The fact that Freddie and Fannie have turned from
taxpayer-financed money pits to cash cows for the federal budget
is certain to complicate reform efforts just gaining momentum in
Washington. The president weighed in on the issue on Tuesday,
calling for a smaller government role in the mortgage market.
Freddie Mac, which has operated under federal
conservatorship since it was seized in 2008 during the financial
crisis, said that based on its net worth of $7.4 billion, it
will make a dividend payment of $4.4 billion to the U.S.
Treasury as part of the reimbursement for its rescue aid.
Meanwhile, the company continued to hold off on writing up
$28.6 billion in tax assets, an accounting move that would
dramatically increase its remittance to the Treasury. A
determination on when to mark up some or all of the so-called
deferred tax assets could occur by year end, the company said.
"If the positive trend in our book and taxable income
continues, we may release the valuation allowance in the next
two quarters," Freddie Mac Chief Executive Officer Donald Layton
said in a conference call.
Fannie Mae has already booked a comparable
allowance in the first quarter, triggering a massive dividend to
the Treasury of $59.4 billion, most of which was attributable
directly to the accounting gain.
For the second quarter, Freddie's net income rose to $5.0
billion from $3.0 billion a year earlier. It was up 9 percent
from the first quarter's $4.6 billion, putting the company on
track for record annual profitability.
Lifting the results were a $1.4 billion gain on interest-
rate swaps that profited from the rise in interest rates during
the quarter. The yield on the benchmark 10-year U.S. Treasury
note, to which mortgage rates are tied, rose 1.05
percentage points in the second quarter on fears that the U.S.
Federal Reserve may soon scale back its massive stimulus
program, called quantitative easing.
The Fed is buying $85 billion a month in Treasuries and
mortgage-backed securities backed by Freddie and Fannie, a
program that had driven interest rates on mortgage loans to
record lows earlier this year.
The Mortgage Bankers Association on Wednesday reported the
average rate for a 30-year fixed-rate mortgage rose to 4.61
percent in the latest week, from 4.58 percent the week before.
Rates were below 3.6 percent in early May and had been below 3.5
percent back in December.
PROFITS FROM HOUSING RECOVERY
The return to profitability of Freddie and Fannie in the
last two years has largely occurred on the back of a continuing
housing market recovery, marked by rising home prices and
falling mortgage delinquencies.
U.S. home prices are rising at the fastest pace since 2006.
The S&P/Case Shiller index of property values in May showed home
prices racked up a hefty 12.2 percent gain from the year before.
Both Freddie Mac and Fannie Mae are required to pay
everything above $3 billion to the Treasury in return for
taxpayer aid under existing bailout terms.
The two companies have paid nearly $132 billion in dividend
payments. Freddie expects to pay the Treasury the $4.4 billion
dividend payment by September, bringing Freddie's total to
roughly $41 billion as the amount of dividends it will have paid
to the Treasury. The company has drawn $71 billion in federal
aid, which leaves taxpayers on the hook for about $30 billion.
The debate over how to restructure Fannie Mae and Freddie
Mac, along with the broader mortgage market, has kicked off in
Congress. President Barack Obama said on Tuesday he wants a
smaller federal role in the housing finance system. Any new
structure is expected to take years, as lawmakers dismantle and
replace the companies.
"There's no question in my mind that the big profits that
both Fannie and Freddie are generating are in some sense
affecting the debate," said Lewis Alexander, chief U.S.
economist at Nomura Securities in New York.
"I think everybody in the mortgage business kind of
understands that the current state of affairs is not credible in
the long run, and to some extent, the profits that Fannie and
Freddie are producing are evidence of that."
Both companies have said they expect to remain profitable.
The reversal of fortune has led speculators to bet that the
companies might repay their debt to taxpayers and exit
government control. Investors, led by a handful of hedge funds,
have recently poured into both the common and preferred stock of
Fannie Mae and Freddie Mac in the hope that the companies will
eventually be able to buy their way out of government control.
Fannie Mae, which has yet to report its second-quarter
results, made a large payment to the Treasury after concluding
that it needed to reverse write-downs of tax assets that led to
billions of dollars in losses when they were written down.
Fannie posted a net income of $58.7 billion in the first
quarter, mainly due to the one-time gain of $50.6 billion
related to the tax assets. The company also reported a pre-tax
income of $8.1 billion for the quarter, compared with a $2.7
billion profit in the same three months a year earlier.