Skip to Page Content | Skip to Site Navigation | Skip to Section Navigation

Freddie Mac Releases Second Quarter 2008 Financial Results

For Immediate Release
August 06, 2008
Contact: corprel@freddiemac.com
or (703) 903-3933

Summary

  • Second quarter net loss of $821 million, or $1.63 per diluted share, compared to a net loss of $151 million, or $0.66 per diluted share, in the first quarter of 2008.
  • Provision for credit losses of $2.5 billion, compared to $1.2 billion for the first quarter of 2008, reflecting increases in delinquency rates, foreclosures and estimated severity of losses driven by continued declines in home prices.
  • Security impairments on the company's available-for-sale securities were approximately $1.0 billion for the second quarter of 2008 primarily related to non-agency mortgage-related securities backed by subprime or Alt-A and other loans due to deterioration in the performance of the collateral and bond insurance underlying these securities.
  • Net interest income of $1.5 billion, up from $798 million in the first quarter of 2008, driven by funding costs at favorable rates and strong retained portfolio growth.
  • Company reaffirms its commitment to raise capital and announces its current expectation, subject to approval by the Board of Directors, to reduce the dividend on its common stock in the third quarter from $0.25 to $0.05 or less per share and to pay the full dividends at contractual rates on its preferred stock.
  • Estimated regulatory core capital was $37.1 billion at June 30, 2008, an estimated $8.4 billion in excess of the company's statutory minimum capital requirement, and $2.7 billion above the 20 percent mandatory target capital surplus.
  • SEC registration process completed with effectiveness of Registration Statement under the Exchange Act on July 18, 2008.

McLean, VA – Freddie Mac (NYSE:FRE) today reported a net loss of $821 million, or $1.63 per diluted common share, for the quarter ended June 30, 2008, compared to net income of $729 million, or $0.96 per diluted common share, for the quarter ended June 30, 2007. The company reported a net loss of $151 million, or $0.66 per diluted common share, for the first quarter of 2008.

"Freddie Mac was created to ensure the continued flow of funds to America's homebuyers, and we are pleased to be fulfilling that important mission," said Richard F. Syron, chairman and chief executive officer. "At a time of severe stress in the housing and credit markets, we are successfully providing critical liquidity and stability.

"While we expect continued housing and economic weakness will affect our overall performance this year, we continue to maintain a surplus over all regulatory capital requirements. We remain committed to raising $5.5 billion of new capital and will evaluate raising capital beyond this amount depending on our needs and as market conditions mandate. We are confident the actions we are taking are strengthening Freddie Mac's financial and competitive position as well as its ability to serve the American homebuyer and will generate value well into the future," concluded Syron.

"During the second quarter, Freddie Mac continued to perform its mission, manage risk and add long-term value through expanded business opportunities," said Buddy Piszel, chief financial officer. "While market and credit conditions remained very challenging during the second quarter, as demonstrated by our increased credit-related expenses and impairments on non-agency mortgage-related securities, our credit guarantee business and mortgage portfolio both saw strong, high quality growth. Freddie Mac's revenue increased by more than 10 percent from the first quarter, including a more than 90 percent increase in net interest income. We are capitalized above regulatory requirements and we continue to have open access to the debt markets."

GAAP Results

 
Three Months Ended
($ in millions) 
June 30, 2008(1)
March 31, 2008
June 30, 2007(1)
Net interest income
$1,529
$798
$793
Management and guarantee income
757
789
591
Other non-interest income (loss)
(593)
(58)
958
Total revenues
1,693
1,529
2,342
Administrative expenses
(404)
(397)
(442)
Credit-related expenses
(2,802)
(1,448)
(463)
Other non-interest expense
(339)
(258)
(614)
Total expenses
(3,545)
(2,103)
(1,519)
Income (loss) before taxes
(1,852)
(574)
823
Income tax benefit (expense)
1,031
423
(94)
Net income (loss)
$(821)
$(151)
$729
Estimated regulatory core
capital
(at period end)
$37,128
$38,320
$35,573

(1) The company's results for the second quarter of 2008, as compared to the second quarter of 2007, benefited from certain accounting and operational changes, including the adoption of SFAS No. 157, "Fair Value Measurements," and SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities – Including an amendment of FASB Statement No. 115." For more information, see NOTE 1: "SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES" in the company's Registration Statement on Form 10, dated July 18, 2008.

 

Net loss for the second quarter of 2008 was $821 million, compared to a net loss of $151 million in the first quarter of 2008.

The key components affecting the company's net loss for the second quarter of 2008 as compared to the first quarter of 2008 were:

Net interest income for the second quarter of 2008 was $1.5 billion, up $731 million, or 92 percent, from $798 million in the first quarter of 2008. This increase was primarily driven by short-term and long-term debt funding at lower rates and strong retained portfolio growth resulting from wider spreads on fixed-rate assets. During the second quarter of 2008, the unpaid principal balance of the company's retained portfolio increased at an annualized rate of 45 percent to approximately $792 billion. The increase reflected the lifting of the retained portfolio growth cap and reduction in capital surplus requirement that both became effective in March as well as favorable purchase opportunities resulting from wider spreads.

Management and guarantee income on PCs and Structured Securities for the second quarter of 2008 was $757 million, down $32 million, or four percent, from $789 million in the first quarter of 2008. This decrease reflects reduced amortization income related to deferred credit and buy down fees as interest rates increased in the second quarter of 2008.

Other non-interest loss for the second quarter of 2008 was $593 million, compared to $58 million in the first quarter of 2008. Included in the second quarter other non-interest loss were mark-to-market losses of $2.3 billion related to the company's trading securities, offset by mark-to-market gains of $1.6 billion and $1.0 billion on the company's guarantee asset and derivatives portfolio, respectively, both due to the impact of increasing long-term interest rates.

Other non-interest loss also included security impairments on the company's available-for-sale securities of approximately $1.0 billion for the second quarter of 2008. Of this amount, $826 million was related to non-agency mortgage-related securities backed by subprime or Alt-A and other loans, due to deterioration in the performance of the collateral underlying these securities. Another contributor to these impairments was credit enhancements related to monoline bond insurance provided by one monoline on individual securities in an unrealized loss position where it has been determined that it is probable that a principal and interest shortfall on the insured bonds will occur and that there is a substantial uncertainty surrounding the insurer's ability to pay all future claims. The company also recognized impairment charges of $214 million related to certain shorter-term available-for-sale non-mortgage-related securities in its cash and investments portfolio. The decision to impair these securities is consistent with the company's consideration of sales of securities from the cash and investments portfolio as a contingent source of liquidity. This compares with $71 million of security impairments on the company's available-for-sale securities for the first quarter of 2008, none of which were associated with subprime or Alt-A and other loans.

Income on the guarantee obligation for the second quarter of 2008 was $769 million, compared to $1.2 billion in the first quarter of 2008. The decrease resulted from accelerated amortization income the company recognized on its guarantee obligation during the first quarter due to greater than expected house price depreciation.

In addition, the company recognized $121 million of income in the second quarter of 2008, compared with $226 million in the first quarter of 2008, associated with the recapture of previously recorded losses on purchased loans due to either borrower payoffs or an excess of the property values upon foreclosure over the carrying basis of these loans.

Credit-related expenses, consisting of provision for credit losses and REO operations expense, were $2.8 billion for the second quarter of 2008, compared to $1.4 billion for the first quarter of 2008. The provision for credit losses for both quarters increased due to credit deterioration in the company's single-family credit guarantee portfolio, primarily due to 2006 and 2007 loan originations, as delinquency rates increased, more loans transitioned from delinquency to foreclosure and the estimated severity of losses on a per-property basis increased. The credit deterioration has largely been driven by the continued decline in home prices and other declines in regional economic conditions, particularly in the North Central, Southeast and West regions. REO operations expense increased as a result of an increase in losses recognized on REO dispositions, due to the decline in home prices, coupled with higher disposition volumes in REO inventory, particularly in the states of California, Florida, Arizona, Virginia and Nevada.

Total credit losses, consisting of net charge-offs plus REO operations expense, were $810 million for the second quarter of 2008, compared to $528 million for the first quarter of 2008. Realized credit losses were an annualized 17.3 basis points and 11.6 basis points of the average total mortgage portfolio for the second quarter and first quarter of 2008, respectively.

The company believes that it is adequately reserved for incurred losses. As of June 30, 2008, the reserve covers approximately 2.7 times of annualized second quarter 2008 contractual net charge-offs.

Other non-interest expense for the second quarter of 2008 was $339 million, compared to $258 million for the first quarter of 2008. This increase was primarily related to increased losses on loans purchased of $120 million for the second quarter of 2008, compared to $51 million for the first quarter of 2008, due to an increase in the volume of purchases of loans with modifications during the second quarter and the continued decrease in fair value of these loans.

Income tax benefit for the second quarter of 2008 was $1.0 billion, compared to $423 million in the first quarter of 2008. This increase in benefit resulted primarily from a $1.3 billion increase in GAAP pre-tax loss and a $171 million favorable tax settlement with the Internal Revenue Service (IRS) related to the tax treatment of the company's customer relationship intangible asset.

Capital & Liquidity

Estimated regulatory core capital was $37.1 billion at June 30, 2008, which represented an estimated $8.4 billion in excess of the company's statutory minimum capital requirement, and an estimated $2.7 billion in excess of the 20 percent mandatory target capital surplus directed by the Office of Federal Housing Enterprise Oversight (OFHEO).

The company is committed to raise $5.5 billion of new core capital given appropriate market conditions and will evaluate raising capital beyond this amount depending on the company's needs and as market conditions mandate. Given the challenges facing the industry, the company expects to take actions to maintain its capital position above the mandatory target capital surplus. Accordingly, subject to approval by its Board of Directors, the company currently expects to reduce the dividend on its common stock in the third quarter of 2008 from $0.25 to $0.05 or less per share and to pay the full dividends at contractual rates on its preferred stock. In addition, the company continues to review and consider other alternatives for managing its capital including issuing equity in amounts that could be substantial and materially dilutive to its existing shareholders, reducing or rebalancing risk, slowing purchases into its credit guarantee portfolio, and limiting the growth or reducing the size of its retained portfolio by allowing the portfolio to run off and/or by selling securities classified as trading or carried at fair value under Statement of Financial Accounting Standards, or SFAS, No. 159, or available-for-sale securities that are accretive to capital (i.e., fair value exceeds amortized cost). The company has retained and is working with Goldman, Sachs & Co. and JPMorgan and the company continues to engage in discussions with OFHEO and the U.S. Department of the Treasury (Treasury) on these matters.

Freddie Mac's liquidity position remains strong as a result of its continued access to the debt markets at attractive spreads, the company's cash and investments portfolio of approximately $70 billion and an unencumbered agency mortgage-related securities portfolio of approximately $470 billion, which could serve as collateral for additional borrowings. Under stressful market conditions, counterparties willing to provide funding based on the company's unencumbered portfolio may be unavailable or may offer terms that are not attractive to the company. On July 13, 2008, the Board of Governors of the Federal Reserve System granted the Federal Reserve Bank of New York the authority to lend to Freddie Mac if necessary. Any such lending would be at the discount rate charged for primary credit and collateralized by U.S. government and federal agency securities. This authorization was intended to supplement the Treasury's existing authority to purchase obligations of Freddie Mac.

The Housing and Economic Recovery Act of 2008 provides the Secretary of the Treasury with temporary authority, until December 31, 2009, to purchase any obligations and other securities the company issues under certain circumstances. See "GSE Oversight Legislation."

Segment Earnings

The company manages and evaluates the financial performance of its business in three reportable segments, the results of which are reported using Segment Earnings. Segment Earnings is a non-GAAP financial measure that differs substantially from, and should not be used as a substitute for, the company's GAAP results.

Consolidated Segment Earnings

On a consolidated Segment Earnings basis, the company recorded a loss of $333 million for the second quarter of 2008, compared to income of $741 million for the second quarter of 2007 and a loss of $251 million for the first quarter of 2008. Second quarter 2008 consolidated Segment Earnings was impacted by higher credit-related expenses in the Single-family Guarantee segment driven by the continued deterioration in the mortgage market.

Reconciliation of Segment Earnings to GAAP Net Income (Loss)
Three Months Ended
($ in millions) 
June 30, 2008
March 31, 2008
June 30, 2007
Segment Earnings (loss) after taxes:
Investments
$793
$113
$571
Single-family Guarantee
(1,388)
(458)
129
Multifamily
118
98
84 
All Other
144
(4)
(43)
Total Segment Earnings, net of taxes 
(333)
(251)
741
Reconciliation to GAAP net income (loss) 
Derivative- and foreign-currency denominated debt-related adjustments
527
(1,194)
471
Credit guarantee-related adjustments
1,818
(174)
831
Investment sales, debt retirements and fair value-related adjustments
(3,096)
1,525
(379) 
Fully taxable-equivalent adjustments
(105)
(110)
(97)
       Total pre-tax adjustments
(856)
47
(116) 
Tax-related adjustments
368
53
104
       Total reconciling items, net of taxes
(488)
100
(12)
GAAP net income (loss) 
$(821)
$(151)
$729

 

See the Appendix for more information on Segment Earnings, including information about how the company uses Segment Earnings and its limitations as a measure of financial performance for the company.

Investments

Segment Earnings - Investments
Three Months Ended
($ in millions) 
June 30, 2008
March 31, 2008
June 30, 2007
Net interest income
$1,481
$299
$990
Non-interest income (loss)
(125)
15
30
Non-interest expense:
       Administrative expenses
(130)
(131)
(133)
       Other non-interest expense
(7)
(9)
(8)
Income tax expense
(426)
(61)
(308)
Total Segment Earnings 
$793
$113
$571

 

Segment Earnings for the company's Investments segment was $793 million for the second quarter of 2008, compared to $113 million for the first quarter of 2008.

The increase of $1.2 billion in net interest income on a Segment Earnings basis was primarily driven by short-term and long-term debt funding at lower rates, strong retained portfolio growth resulting from wider spreads on fixed-rate assets and reduced expense related to derivatives. During the second quarter of 2008, the company recognized security impairments on available-for-sale securities in Segment Earnings of $142 million associated with anticipated future principal credit losses on its non-agency mortgage-related securities.

Single-family Guarantee

Segment Earnings - Single-family Guarantee
Three Months Ended
($ in millions) 
June 30, 2008
March 31, 2008
June 30, 2007
Net interest income
$58
$77
$179
Non-interest income:
       Management and guarantee income
840
895
704
       Other non-interest income
103
104
28
Non-interest expense:
       Administrative expenses
(212)
(204)
(209)
       Provision for credit losses
(2,630)
(1,349)
(469)
       REO operations expense
(265)
(208)
(16)
       Other non-interest expense
(29)
(19)
(19)
Income tax (expense) benefit
747
246
(69)
Total Segment Earnings 
$(1,388)
$(458)
$129

 

Segment Earnings for the company's Single-family Guarantee segment was a loss of $1.4 billion for the second quarter of 2008, compared to a loss of $458 million for the first quarter of 2008.

The decline primarily reflects a $1.3 billion increase in credit-related expenses, consisting of provision for credit losses and REO operations expense, due to higher delinquency rates, higher volumes of non-performing loans and foreclosures, higher severity of losses on a per-property basis driven by a decline in home prices and other regional economic conditions, particularly in the North Central, Southeast and West regions. REO operations expense increased as a result of an increase in losses recognized on REO dispositions, due to the decline in home prices, coupled with higher disposition volumes in REO inventory, particularly in the states of California, Florida, Arizona, Virginia and Nevada.

Multifamily

Segment Earnings - Multifamily
Three Months Ended
($ in millions) 
June 30, 2008
March 31, 2008
June 30 , 2007
Net interest income
$98
$75
$94
Non-interest income:
       Management and guarantee income
17
17
16
       Other non-interest income
7
8
5
Non-interest expense:
       Administrative expenses
(49)
(49)
(49)
       Provision for credit losses
(7)
(9)
(1)
       LIHTC partnerships
(108)
(117)
(135)
       Other non-interest expense
(5)
(4)
(8)
LIHTC partnerships tax benefit
149
149
135
Income tax benefit
16 
28 
27
Total Segment Earnings 
$118
$98
$84

 

Segment Earnings for the company's Multifamily segment was $118 million for the second quarter of 2008, compared to $98 million for the first quarter of 2008.

The increase of $23 million in net interest income on a Segment Earnings basis was primarily due to higher average balances held in the multifamily loan portfolio.

All Other

All Other, which includes corporate-level expenses not allocated to any of the company's reportable segments, includes income of $144 million for the second quarter of 2008, compared to a loss of $4 million for the first quarter of 2008. The second quarter of 2008 includes a $171 million favorable tax settlement with the IRS related to the tax treatment of the company's customer relationship intangible asset.

Fair Value of Net Assets 

The company's attribution of changes in fair value relies on models, assumptions and other measurement techniques that evolve over time.

At June 30, 2008, the fair value of net assets was ($5.6) billion as compared to ($5.2) billion at March 31, 2008, reflecting a net after-tax reduction of $0.4 billion. This change in fair value of net assets includes the payment of $231 million in preferred stock and $165 million in common stock dividends during the second quarter of 2008. Absent those dividend payments, the fair value of net assets at June 30, 2008 remained unchanged from March 31, 2008.

The investment activities resulted in a pre-tax $6.7 billion increase to fair value of net assets which was primarily due to core spread income of $4.9 billion, reflecting the reversal of mark-to-market impacts from previous periods as well as a $1.9 billion increase in fair value as a result of net mortgage-to-debt OAS tightening. These gains were offset by a pre-tax reduction of $6.2 billion in the fair value of the company's credit guarantee activities due to declining credit environment.

Interest-Rate Risk Management

During the second quarter of 2008, Freddie Mac's interest-rate risk remained low with portfolio market value sensitivity (PMVS-L) averaging $513 million and duration gap averaging zero months, compared to $403 million and zero months, respectively, for the first quarter of 2008.

GSE Oversight Legislation

The Housing and Economic Recovery Act of 2008 was signed into law on July 30, 2008. Division A of this legislation, the Federal Housing Finance Regulatory Reform Act of 2008, or the Regulatory Reform Act, establishes a new regulator for Freddie Mac, the Federal Housing Finance Agency (FHFA), with enhanced regulatory authorities relating, among other things, to the company's minimum and risk-based capital levels and business activities including portfolio investments, new products, management and operations standards, affordable housing goals and executive compensation. The Regulatory Reform Act expands the circumstances under which the company could be placed into conservatorship and also authorizes FHFA to place the company into receivership under specified circumstances. The Regulatory Reform Act also requires the company to allocate or transfer certain amounts to (i) the Secretary of Housing and Urban Development to fund a Housing Trust Fund and (ii) a Capital Magnet Fund administered by the Secretary of the Treasury. In addition, the Regulatory Reform Act provides the Secretary of the Treasury with temporary authority, until December 31, 2009, to purchase any obligations and other securities the company issues under certain circumstances.

Given the recent enactment of this Act and the fact that FHFA has considerable discretion in implementing its provisions, including through rulemaking proceedings and the issuance of orders, the company cannot predict the impacts that the Act and FHFA's exercise of its authority under the Act will have on Freddie Mac's business, financial position or results of operations. However, to the extent the Act or regulations or orders issued by FHFA pursuant to the Act may, for example, increase the company's capital requirements, limit its portfolio and new product activities, increase its affordable housing goals, or limit its ability to attract and retain senior executives, the company anticipates that the impact could be materially adverse.

Additional Information

For more information, including an update on the company's “Internal Control Over Financial Reporting”, see the Appendix accompanying this release, the company's Current Report on Form 8-K dated August 6, 2008, and the company's Consolidated Financial Statements, Core Tables and slide presentation. All of these documents will be available on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors.

Additional information about Freddie Mac and its business is also set forth in the company's filings with the SEC, including the company's Registration Statement on Form 10, dated July 18, 2008, which are available on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors and the SEC's Web site at www.sec.gov. Printed copies of these documents may be obtained free of charge upon request from the company's Investor Relations department by writing or calling the company at shareholder@freddiemac.com, (703) 903-3883 or (800) 373-3343. Freddie Mac encourages all investors and interested members of the public to review these materials for a more complete understanding of the company's financial results and related disclosures.

Announcement of Conference Call and Webcast

Management will host a conference call discussing today's announcement at 10 a.m. Eastern Time today. Domestic investors should call 1-800-553-5260 and international investors can access the call at 612-332-0630. The conference call will be webcast live on the company's Web site. A telephone recording of this conference call will be available continuously beginning at approximately 3 p.m. Eastern Time on August 6, 2008 until midnight on August 20, 2008. To access this recording in the United States, call 1-800-475-6701 and use access code 951871. Outside of the United States, call 320-365-3844 and use access code 951871.

This press release contains forward-looking statements pertaining to management's current expectations as to the company's future business plans, capital management, credit losses and credit-related expenses, returns on investments, results of operations and/or financial condition on a GAAP, Segment Earnings, or fair value basis. Management's expectations for the company's future necessarily involve a number of assumptions, judgments and estimates, and various factors, including changes in market conditions, liquidity, mortgage-to-debt OAS, credit outlook, and the impacts of newly enacted legislation or regulations, could cause actual results to differ materially from these expectations. These assumptions, judgments, estimates and factors are discussed in the company's Registration Statement on Form 10, dated July 18, 2008 and Current Reports on Form 8-K, which are available on the Investor Relations page of the company's Web site at www.FreddieMac.com/investors and the SEC's Web site at www.sec.gov.

Freddie Mac is a stockholder-owned corporation established by Congress in 1970 to provide liquidity, stability and affordability to the nation's residential mortgage markets. Freddie Mac raises capital on Wall Street and throughout the world's capital markets to finance mortgages for families across America. Over the years, Freddie Mac has made home possible for one in six homebuyers and more than five million renters.

Back to Top