Freddie Mac earnings mixed as CEO preps for departure

Freddie Mac's latest earnings reveal a reliance on home prices — and vulnerability to certain risks — that are similar to its competitor's, but with lower numbers as is typical due to its size.

The government-related mortgage buyer's $2.7 billion in net income represented a year-over-year gain but was lower than in the previous quarter. It earned $2.9 billion during the second quarter of this year and $1.3 billion during the third fiscal period in 2022.

The company's larger rival, Fannie Mae, had previously reported that it generated $4.7 billion in net income, an amount down nearly $300 million on a consecutive-quarter basis but almost twice its quarterly earnings a year earlier.

Both government-sponsored enterprises have attributed the trends in their results to changes in their single-family credit reserves, which are driven by housing valuations.

"An increase in observed and forecasted house price appreciation drove a $263 million benefit for credit losses this past quarter, versus an expense of $1.8 billion in the prior year quarter," Chris Lown, Freddie Mac's chief financial officer, said during an earnings call Wednesday.

Also, a courtroom ruling against both government-sponsored enterprises in legacy shareholders' favor resulted in hundreds of millions of dollars in costs for both in the latest fiscal period, suggesting their consecutive-quarter results might've been closer to even without it. 

Gains in Freddie Mac earnings were "partially offset by a $751 million or 41% increase in our noninterest expense, which was primarily driven by an allocation of $313 million dollars for the accrual for the judgment," Lown said.

So long as employment is strong enough to create demand that outpaces what's been a limited supply of homes in a higher-rate market, strength in housing valuations and the credit outlook will likely remain key drivers of the two government-sponsored enterprise's earnings.

Monetary policymakers seem likely to keep their rate tightening cycle on hold with an announcement on that front pending at the time of this writing Wednesday and delinquency rates on both sides of the business remain historically low, albeit rising in the multifamily unit.

Executives from the enterprises recently characterized the slight uptrend in delinquencies tied to the senior housing portfolio as one of the things that keep them up at night, and it was evident in both Freddie's and Fannie's third quarter numbers.

Multifamily arrears rose to 24 basis points from 21 the previous quarter and 13 a year ago due to senior housing exposures.

The credit issues put downward pressure on multifamily results. 

Total net revenues from multifamily were $800 million during the quarter, equal to a year ago but down from $1 billion a quarter earlier. Net income for the quarter in multifamily was $400 million, compared to $600 million a quarter earlier and $300 million a year ago. 

"This [consecutive-quarter] decrease was primarily driven by higher provision for credit losses and higher noninterest expense in this period," Lown said. "The provision for credit losses and multifamily this quarter was $41 million, an increase of $29 million from the prior year quarter."

However, the serious delinquency rate in the single-family unit dropped by 12 basis on a consecutive-quarter basis to 55. A year ago, the single-family SDQ rate was 67. Single-family generally is a larger business and more of a driver of enterprise earnings than multifamily.

Net income in this unit totaled $2.3 billion in the third quarter with new business activity during the period consisting of $76 billion in purchase loans and $9 billion of refinances for a total of $85 billion, up from $83 billion the previous quarter and down from $121 billion a year earlier.

Net revenues in single-family were up relatively to both the previous quarter and a year ago at $4.9 billion vs. $4.4 billion in both comparative periods.

Interest as well as noninterest income from investment has contributed to revenues in the higher rate environment, Lown noted.

Freddie Mac CEO Michael DeVito, who plans to retire in the first quarter of next year, said a notable accomplishment for the enterprise during the quarter and his time at the helm has been its ability to maintain both financial stability and its housing mission in different market cycles.

Net worth grew to nearly $44.7 billion during the quarter from almost $42 billion the previous fiscal period and $35.2 billion a year earlier, but remains below the target regulators have called upon it to reach before resuming dividend payments to the Treasury while in conservatorship.

"Freddie Mac has maintained its countercyclical role. The company's market presence in the early days of the pandemic, and current support for the housing market are solid examples," DeVito said.