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Freddie Mac Gains Market Share, But Earnings Slip

Freddie Mac, which is almost current on its earnings releases, reported that first-half 2005 profits tumbled by 60% as net interest income fell and it took a massive loss on its derivatives positions.

The company, however, bragged that its GSE market share increased to 44% (from 41%) and promised equities analysts that going forward it would "touch more loans" by increasing what it called its "sourcing" channels.

Freddie's cross-town rival, Fannie Mae, has stopped reporting earnings for the time being as it undergoes a massive restatement process. Freddie is at the tail end of its restatement process and hopes to be totally current early next year.

Meanwhile, the two GSEs are facing increased competition from banks and Wall Street conduits, which are promoting and purchasing nontraditional products including interest-only loans and payment-option ARMs.

Freddie Mac, which earned $1.64 billion, also reported that guarantee fee and "contractual management" income rose to $720 million in the first half (16.4 basis points), compared to $635 million in the comparable period last year. But annualized, its "g-fee" income fell to 15.8 basis points, compared to 16.6 bps a year ago.

Freddie took a $747 million derivatives loss in the first half compared to a gain of $521 million in the year-ago period.

Freddie released its earnings after the market closed last Wednesday. In trading last Thursday, its stock fell more than $2 a share, setting a new 52-week low of $58.05. (Fannie's stock, too, fell to a new 52-week low.)

During a conference call with analysts, Freddie Mac chief executive Richard Syron said that even though the company's earnings fell, its balance sheet is now in "great shape" with excess capital of $12 billion.

Analysts that follow the stock are curious about when Freddie's regulator, the Office of Federal Housing Enterprise Oversight, will lift the 30% capital surcharge it has imposed on the GSE.

Mr. Syron said, "We're cognizant of the fact that it's your money. We have significantly more capital than we need right now."

Once Freddie becomes a Securities and Exchange Commission registrant, OFHEO likely will lift the capital surcharge.

After the conference call, Sandler O'Neill issued a report on Freddie, maintaining its "hold" rating on the company.

Freddie analyst Laura Kaster wrote: "We remain cautious until we have increased comfort and visibility in the core earnings power of the company with additional financial disclosures."

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