Freddie expects hurricane losses, but still reports $4.7B profit

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WASHINGTON — A private-label securities settlement, portfolio asset sales and greater interest among smaller lenders helped Freddie Mac compensate for potential losses stemming from the catastrophic hurricane season, the mortgage giant said Tuesday.

Freddie Mac reported comprehensive income of $4.7 billion for the third quarter despite also reporting a $900 million pretax provision for potential hurricane losses. The provision for hurricane-related losses — stemming from damage caused by Hurricanes Harvey, Irma and Maria — translated to $600 million after taxes.

"About two-thirds of this additional reserve is related to Maria because at this time we expect a considerably higher severity of losses in Puerto Rico and the Virgin Islands than on the mainland," Freddie Mac chief executive Donald Layton said in a conference call with reporters. "We have much less information on the islands and the information we have shows a much worse situation."

But Freddie's earnings from the third quarter benefited from a private-label securities settlement that resulted in a $2.9 billion after-tax gain. The government-sponsored enterprise also benefited from tightening market spreads and the sale of assets from the agency's mortgage investment portfolio.

"We are very happy with our performance," Layton said.

The chief executive also noted Freddie is attracting more small and midsize lenders to use its cash window. Both small banks and nonbank mortgage lenders rely on Fannie Mae and Freddie's windows to turn loans into cash.

"To attract small lenders we had to invest and upgrade our cash window," Layton said in an interview following the conference call.

In 2011, only 15% of the single-family loans that Freddie securitized and sold to investors were purchased through its cash window.

Now the cash window is running at 40%. "That is a big improvement for supporting lenders of all sizes," Layton said in the interview.

The $4.7 billion in comprehensive income for the quarter was more than double the company's total in in the second quarter of $2 billion, as well as the $2.3 billion reported in the third quarter of 2016.

Yet despite the successful third quarter, still looming large in the background was the continuing obligation for both Fannie and Freddie to sweep profits into the Treasury Department as part of the federal conservatorships of the two companies. (Fannie is expected to report earnings later this week.)

Freddie is slated to pay all $4.7 billion as a dividend to the Treasury in December for its line of credit. Freddie has already paid $110 billion to the Treasury since it was placed in conservatorship in 2008, which is approximately 55% more than the company received in support from the U.S government when the GSE suffered staggering losses during the housing crisis.

Critics of the GSE dividends say the profit sweeps could put the mortgage giants in a dire capital position.

The earnings report Tuesday "illustrates the incongruity under which Freddie Mac could post a 3rd quarter 2017 profit of almost $5 billion — but because of the arbitrary sweep agreement could require a Treasury advance next year with a quarterly loss of as little as $5 million," Scott Olson, executive director of the Community Home Lenders Association, said in a press release.

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GSEs Mortgages Hurricane Maria Natural disasters Earnings Hurricane Irma Hurricane Harvey Freddie Mac