Freddie Mac profits wane with cooling housing demand

Freddie Mac's net income last year fell almost a quarter compared to 2021's earnings as the government-sponsored enterprise reckoned with the market's slowdown and a forecast of diminishing home valuations.

The GSE reported Wednesday $9.3 billion in net income and $9 billion in comprehensive income in 2022, both representing 23% dips from the year prior. A $1.8 billion provision for potential credit losses was the primary factor in the decline, it said.

That provision grew from $1 billion in 2021, when the GSE enjoyed a banner year. In the fourth quarter alone, the provision jumped to $0.6 billion compared to $0.1 billion at the same time last year, said Chris Lown, executive vice president and chief financial officer at Freddie Mac. 

"This was primarily driven by declining observed and forecasted house price appreciation, partially offset by lower purchase volumes," he said. Freddie Mac cited appreciation at 4.1% in 2022 compared to 17.9% the year before.

The net income drop was more pronounced in Freddie Mac's fourth quarter result, which at $1.8 billion was down 36% from the fourth quarter of 2021. Freddie Mac reported net income of $1.3 billion in Q3 and $2.5 billion in Q2. Executives pinned the fourth quarter decline on lower net revenues and a credit reserve build in the single-family business.

Single-family net income sat at $7.9 billion in 2022, a figure that dropped $918 million, or 10% from 2021, the GSE reported. Its net allowance for credit losses in the category rose 42% year-over-year to $7.7 billion. 

Business in the single-family category tumbled to $541 billion in 2022, a $679 billion plunge from 2021's record volume, Freddie Mac said. Activity fell significantly in the fourth quarter by 72% year-over-year to $75 billion, on the heels of rising mortgage rates. 

Overall, the GSE's portfolio rose 7% to $3 trillion, driven in part by higher average loan sizes compared to older vintages, Lown added. The serious delinquency rate in the year's final three months was also down to 0.66% from 1.12% at the end of 2021 as forbearances decreased. Freddie Mac counted 136,000 loans in single family workouts, down from 317,000 two years ago.

Net revenue was $21.3 billion last year, a 3% annual decrease stemming from waning multifamily non-interest income offsetting single family net interest income gains. Single-family net revenue accounted for $18.8 billion, a $1.5 billion jump from 2021. Net interest income meanwhile was $18 billion for 2022, a 2% year-over-year bump.

"Continued mortgage portfolio growth and higher average portfolio guarantee fee rates were partially offset by lower deferred fee income due to slower prepayments as a result of higher mortgage interest rates," said Lown. 

Freddie Mac's net worth rose 32% to $37 billion to close 2022, executives said. 

CEO Michael DeVito during the call touted the GSE's advances in facilitating the use of on-time rent payments in underwriting, which has captured over 150,000 enrollments and more than 21,000 prospective borrowers establishing credit scores for the first time. Freddie Mac in September also began allowing lenders and brokers to review borrowers' bank account data to incorporate positive monthly cash flows into underwriting. 

"While these are still new initiatives, we're already seeing positive results from lenders who are using these strategies with borrowers, resulting in higher loan acceptance rates," he said.