Profits drop in 1Q, but Freddie Mac is 'withstanding the crisis'

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While Freddie Mac stabilized liquidity in mortgage markets, coronavirus-related credit losses drove the GSE's income down in the first quarter of 2020.

Freddie generated $173 million in net profit in the first quarter, down from $2.6 billion the previous quarter and from $1.4 billion year-over-year. Comprehensive income followed suit. The government-sponsored enterprise produced $622 million in the first quarter, down from nearly $2.5 billion in the fourth quarter and almost $1.7 billion a year ago.

"Our book is generally performing well and we are withstanding this crisis," CEO David Brickman said on the earnings call. "We have acted quickly to provide direct relief to millions of homeowners and property owners, and indirectly to renters hurt by the pandemic."

The government-sponsored enterprise maintained its pipeline of liquidity to lenders by purchasing loans of borrowers granted forbearance due to COVID-19. However, post-tax credit expenses of about $900 million resulting from the pandemic drove down profits. Expected recoveries from credit enhancements should help partially offset those losses. As of March, credit risk transfer transactions covered 51% of Freddie's single-family guarantee portfolio.

The GSE's total equity rose to $9.5 billion in the first quarter from $9.1 billion at the close of the 2019. Changes in equity normally track with comprehensive income, but this lesser amount corroborates the adjustment of approximately $240 million to retained earnings for the adoption of CECL made on Jan. 1. Regardless, any added capital "strengthens our balance sheet in the face of this crisis and advances our goal of responsibly exiting conservatorship," Brickman said.

The current effects of COVID-19 and the deeply uncertain times ahead present the "greatest challenge to the housing market in more than a decade," Brickman added. Freddie Mac anticipates the impact to last into 2021 and perhaps beyond. Although home prices grew in the first quarter, Brickman said he expects them to fall significantly in the second quarter based on current assumptions before beginning to recover over the next year.

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Earnings Freddie Mac Credit risk transfers GSEs Coronavirus CECL