Freddie Mac 4Q profit drops sharply

Associated Press

Washington — Mortgage giant Freddie Mac posted net income of $227 million for the fourth quarter, down sharply from the same period of 2013, as it sustained losses on the investments it uses to hedge against swings in interest rates.

Nonetheless, the October-through-December results reported Thursday marked the government-controlled company’s 13th straight profitable quarter.

McLean, Virginia-based Freddie also said it will pay a dividend of $900 million to the U.S. Treasury next month. Freddie will have paid $91.8 billion in dividends, exceeding its government bailout of $71.3 billion.

The government rescued Freddie and larger sibling Fannie Mae at the height of the financial crisis in September 2008, after they piled up losses on risky mortgages in the housing market bust. Together the companies received taxpayer aid totaling $187.3 billion.

Freddie and Fannie own or guarantee about half of all U.S. mortgages, worth about $5 trillion. Along with other federal agencies, they back roughly 90 percent of new home loans.

The two companies don’t directly make loans to borrowers. They buy mortgages from lenders, package them as bonds, guarantee them against default and sell them to investors. That helps make loans available.

Freddie’s fourth-quarter profit was well below the $8.6 billion it earned in the same period of 2013.

For all of 2014, Freddie reported net income of $7.7 billion, down from $48.7 billion in 2013. It was the company’s third straight profitable year.

The company improved its operations “through innovation and efficiency,” Freddie CEO Donald Layton said in a statement.

The decline in full-year profit also was attributed largely to losses from derivatives, financial transactions that Freddie uses to hedge against swings in interest rates, as long-term rates fell during the period. Freddie reported derivatives losses of $3.4 billion in the fourth quarter and $8.3 billion in 2014.

Freddie said the hedging losses “did not fully reflect the underlying economics of the company’s business.”

The decline in interest rates continued despite the October end of the Federal Reserve’s monthly bond purchases, which had been intended to keep long-term rates low.

The gradual recovery of the housing market has made Freddie and Fannie profitable again.

The market’s revival beginning in 2012 has been fitful, and housing has lagged behind the rest of the economy. Despite the low borrowing rates that could lure prospective homebuyers, the market has remained hampered by tight mortgage credit, rising home prices and stagnating incomes.

The federal agency that regulates Freddie and Fannie took action in December to allow Americans to buy homes with down payments as low as 3 percent, down from the current 5 percent minimum. The new guidelines are meant to make houses more affordable for low-income families and first-time buyers.