Freddie Mac’s (FRE) first quarter net loss came in at $2.06 per share, substantially lower than the Zacks Consensus Estimate of a loss of $2.45. This also compares favorably with a net loss of $2.39 in the prior quarter. Results for the quarter exclude the preferred dividend of $1.3 million paid to the U.S. Treasury on the senior preferred stock. Including this, net loss came in at $2.45 per share, which was in line with the estimates.
With some early signs of stability in the housing market, Freddie Mac expects low mortgage rates, relatively high affordability and the homebuyer tax credit to help fuel the recovery in the upcoming quarters. Though provision for credit losses showed some improvement over the prior quarter, it remained at an elevated level as the credit market continued to deteriorate due to challenging economic conditions.
Freddie Mac mainly focuses on initiatives that support the Making Home Affordable Program (MHA Program) announced by the Obama Administration in February 2009. As a leading player, Freddie Mac continued to support the housing market during the first quarter of 2010.
During the reported quarter, Freddie Mac helped more than 71,000 borrowers stay in their homes or sell their properties through its long-standing traditional foreclosure avoidance programs and Home Affordable Modification Program (HAMP).

Further, the company infused approximately $97 billion into the mortgage market to provide liquidity, helping more than 440,000 families own or rent a home. Additionally, 148,881 loans remained in HAMP’s trial periods as of Mar 31, 2010, as per the information provided by the MHA program administrator.
Net loss (excluding preference dividend) for Freddie Mac for the reported quarter was $6.7 billion, compared with a net loss of $7.8 billion in the prior quarter. During the reported quarter, provision for credit losses was $5.4 billion, compared with $7.0 billion in the prior quarter.
Net interest income was $4.1 billion for the reported quarter, down from $4.5 billion in the prior quarter. Net interest yield was 0.68%, down 143 basis points (bps) sequentially. The decrease in net interest yield in the reported quarter was primarily driven by higher average balance of non-performing mortgage loans and a decrease in PCs held by the company as a result of the consolidation of variable interest entities (VIEs).

Consolidation of VIEs also resulted in the inclusion of narrower spreads across the company’s management and guarantee fee business with the historically wider spreads on its investment assets.
Effective Jan 1, 2010, Freddie Mac prospectively adopted amendments to the accounting standards for transfer of financial assets and consolidation of VIEs.

Accordingly, management and guarantee income on Freddie Mac’s GAAP income statement will no longer be recognized on issued single-family PCs. Henceforth, this will be accounted in Single-family Guarantee segment. Management and fee income in this segment totaled $848 million during the reported quarter, up from $743 million in the prior quarter.
Other non-interest loss for the quarter came in at $4.9 billion, compared with an income of $883 million in the prior quarter. Other non-interest income for the quarter included derivative losses of $4.7 billion, compared with $0.7 million in the prior quarter, reflecting the effect of lower long-term interest rates on the company’s derivative portfolio.
Credit quality significantly worsened during the quarter. Total single-family delinquency rate, including Structured Transactions, increased 15 bps sequentially to 4.13%. At the same time, Single-family net charge-offs increased to $2.8 billion from $2.4 billion in the prior-quarter, primarily due to an increase in foreclosure transfers. Total non-performing assets increased to $115 billion as on Mar 31, 2010 from $103 billion as on Dec 31, 2009.
Net worth as on Mar 31, 2010 was a deficit of $10.5 billion, compared with a positive $4.4 billion as on Dec 31, 2009. The decline resulted from the quarterly net loss of $6.7 billion and the dividend payment of $1.3 billion to the Treasury on the senior preferred stock.

As a result of the net worth deficit, the Federal Housing Finance Agency (FHFA), as Conservator on behalf of Freddie Mac, will submit a request for additional funding worth $10.6 billion to the Treasury under the terms of the preferred stock purchase agreement. Freddie Mac expects to receive these funds by Jun 30, 2010.


Read the full analyst report on “FRE”
Zacks Investment Research