Freddie Reports Seventh Consecutive Profitable Quarter

Freddie Mac posted earnings of $5 billion in the second quarter, up from $4.6 billion in the first quarter as delinquencies on its single-family portfolio continued to decline and refinancing volumes remained strong.

But the secondary market agency is preparing for a significant drop in refinancings during the second half of this year, which could crimp earnings.

Freddie chief executive Donald Layton told reporters during a conference call that refinancings still comprised 70% of the total origination market.

“Our economists estimate that the refinancing share could possibly decline even as low as 40% by the end of the year,” Layton said on the Wednesday morning conference call.

Freddie Mac’s second-quarter financial report shows that the GSE’s share of the refinancings was larger than the overall market.

Freddie acquired $211 billion in refinanced loans during the first half of 2013, which represented 81% of all single-family loans it acquired from lenders. The GSE acquired $51 billion in purchase mortgages during the first six months of this year.

“We are helping mortgage lenders prepare for this shift in numerous ways,” the CEO said. That includes “providing them with greater purchase certainty in the mortgages they deliver to us through new tools like the recently introduced Loan Quality Advisor product.”

In releasing its second-quarter results, Layton noted that Freddie will pay a $4.4 billion dividend to Treasury as part of its conservatorship agreement.

“Our return to profitability has significantly increased our ability to return value to taxpayers,” the CEO said. By September, Freddie will have paid $41 billion in dividends on the $72.3 billion in draws it received from Treasury to remain solvent after the housing crash. (Dividend payments, however, don’t reduce the $72.3 billion Freddie owes the Treasury.)

Meanwhile, Freddie decided not to release its deferred tax assets even though the GSE has not needed a draw from Treasury over the past five quarters. Fannie Mae recognized its deferred tax assets in the first quarter and sent a $59.4 billion dividend check to Treasury.

Despite Freddie’s improved financial strength, company executives want to wants of see if positive trends in taxable income and the housing market continue before recognizing its $28.6 billion deferred tax valuation allowance.

If these positive trends continue, “we may release the valuation allowance in the next two quarters,” Freddie’s CEO said.

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