Freddie Mac's 2Q earnings rise on single-family reserve release

Freddie Mac's second quarter earnings increased due to a release of money set aside for credit losses in the single-family business. But the government-sponsored enterprise had to boost its provision for multifamily mortgages as a result of problems in its senior housing portfolio.

The McLean, Virginia-based company earned $2.9 billion for the most recent quarter, compared with just under $2 billion three months prior and $2.4 billion for the second quarter of 2022.

Fannie Mae's second quarter results similarly benefitted from a release of reserves, in that case by $1.3 billion.

The second quarter results bring Freddie Mac's net worth to almost $42 billion. That is almost one-third of the $123 billion the company would be required to hold to exit conservatorship, based on first quarter calculations made by Keefe, Bruyette & Woods.

However, the additional net worth Freddie Mac retained increased the liquidation preference for the preferred stock held by the U.S. Treasury to $111.7 billion as of June 30, with a further boost to $114.6 billion at the end of the current quarter.

In the past year, the GSE has added $7.9 billion of net worth as it is now able to retain 100% of its earnings. That increase "contributes to Freddie Mac's financial stability and our ability to serve our mission," said CEO Michael DeVito on the earnings call.

As is standard on its earnings calls, company management did not address how the additional net worth affects the conservatorship.

Slower prepayment speeds due to high interest rates reduced Freddie Mac's net interest income to $4.5 billion when compared with the second quarter of 2022, when it was $4.8 billion, Chris Lown, chief financial officer, said on the earnings call.

"The decline in revenues was partially offset by higher non-interest income of $816 million, up 27% year-over-year, primarily driven by higher guarantee income and investment gains in our multifamily business," Lown said.

Net revenue ended the quarter at $5.3 billion, versus $5.4 billion in the same period one year prior. In the first quarter, Freddie Mac's net revenue was $4.8 billion as non-interest income was just $326 million.

The single-family business reported net income of $2.4 billion for the second quarter compared with $1.7 billion in the first quarter and $2.2 billion on a year-over-year basis.

Quarter-to-quarter new business activity increased by 41%, to $83 billion ($73 billion of that purchase) from $59 billion ($51 billion purchase) for the period ended March 31. A year ago, Freddie Mac did $138 billion, to which Lown attributed to the lower interest rate environment given that $86 billion was purchase mortgages and $52 billion came from refinancings.

The guarantee fee for acquired loans averaged 57 basis points this quarter, Lown added. That was up by 2 basis points from 55 in the first quarter and 5 basis points higher than in the second quarter of 2022, when it was 52.

"In the second quarter, we helped 372,000 families buy, refinance or rent a home," up over 40% versus the first quarter, DeVito said. "This includes 102,000 first-time home buyers, representing more than 51% of the owner-occupied homes we helped to finance, which is a historic high."

The serious delinquency rate in its single-family loan portfolio fell 20 basis points from the prior year to 0.56%. Improved credit conditions allowed Freddie Mac to release $638 million of reserves, helped by actual and forecasted improvements in home price appreciation.

In the second quarter of 2022, Freddie Mac added $298 million to reserves when the U.S. economic picture was bleak, and that was tied in with growth in its single-family portfolio, Lown said.

Things on the multifamily side's credit performance, both year-over-year and especially quarter-to-quarter, were tougher.

With issues in the senior housing portfolio, Freddie Mac's multifamily delinquency rate as of June 30 was 21 basis points, compared with 13 basis points on March 31 and just 7 basis points on the same day one year earlier. But 95% of the delinquent loans do have some form of credit enhancement attached.

Fannie Mae also reported its senior housing portfolio was under stress.

New business activity did rebound from the first quarter to $13 billion from just $6 billion. It was lower than the $15 billion added in the second quarter of 2022 as higher interest rates reduced demand for multifamily mortgages, Lown said.

Even with the credit provision, multifamily earned $563 million for Freddie Mac, an improvement from the first quarter's $318 million and $285 million for the second quarter of 2022.

The year-over-year gain in multifamily to the increase in noninterest income to $751 million from $309 million. 

"Guarantee income increased primarily due to lower fair value losses on guarantee assets as a result of smaller interest rate increases," Lown explained. "And investment gains increased primarily due to fair value gains from interest rate risk management activities specific to our guarantee assets and indexed lock agreements."