Freddie Mac's 2Q earnings down 33% from prior period

Freddie Mac's second quarter earnings declined from the prior quarter and previous year as the company had to make a provision for credit losses instead of being able to recoup those funds.

The government-sponsored enterprise was still highly profitable, however, earning $2.5 billion for the period ended June 30, compared with $3.8 billion in the first quarter and $3.7 billion for the second quarter of 2021.

"This was a good quarter for Freddie Mac," CEO Michael DeVito said during the earnings call. "In an uncertain time for the market, we achieved solid financial results and continued to build equity to withstand potential economic stress."

Mortgage industry economists are worried about the effects of inflation and the likelihood of a recession on the housing market.

Even with the drop in earnings, Freddie Mac's net worth increased during the quarter by $2.4 billion to a total of $34.1 billion. However, this is still below what Freddie Mac needs under the Federal Housing Finance Agency's revised capital rule; at the end of the first quarter, Keefe, Bruyette & Woods estimated that Freddie Mac would need to have $130 billion in retained capital when it exits conservatorship.

Freddie Mac's earnings decrease was primarily driven by a $307 million provision to cover potential credit losses. Last quarter, it took an $800 million benefit from the reserve while in the second quarter of 2021, Freddie Mac's earnings gained from a $740 million reversal.

The majority of this provision was attributed to Freddie Mac's single-family business. This segment's earnings were impacted by a $298 million credit loss provision "primarily driven by portfolio growth and deterioration in forecasted economic conditions," Chris Lown, chief financial officer, said on the earnings call.

Freddie Mac earned $2.2 billion on its single-family business, compared with $3.4 billion in the first quarter and $4.7 billion in the second quarter last year.

Ironically, Freddie Mac took the provision even though its loan portfolio's performance improved during the second quarter compared with the prior periods. The seriously delinquent rate of 0.76% was down from 0.92% by March 31 and 1.86% as of June 30, 2021. The drops were driven by the decline of the number of loans in forbearance. The single-family delinquency rate, as well as the same for its multifamily portfolio at just 7 basis points, were both near pre-pandemic lows, DeVito said.

"As the overall forbearance population continues to decline, our single family allowance for credit losses to total loans outstanding coverage ratio increased to 17 basis points this quarter from 15 basis points in the previous quarter," Lown said. "At the end of the second quarter 59% of our single family portfolio was covered by some form of credit enhancement."

The single-family mortgage portfolio grew 14% year-over-year to $2.9 trillion at the end of the second quarter. This was due to an increase in the average portfolio loan size as well as Freddie Mac taking a higher share of the overall secondary market, Lown said.

However, new single-family business activity was hard hit by the decline in refinance originations, Lown said. For the second quarter, Freddie Mac purchased $138 billion of residential mortgages, of which just $52 billion were refis.

In the first quarter, it purchased $207 billion, with refis making up $114 billion of the total, while for the second quarter of 2021, acquisitions totaled $288 billion, including $190 billion of refinancings.

But the average guarantee fee charged for the new acquisitions increased to 52 basis points from 49 bps for those prior periods.

Freddie Mac's single-family net revenue of $4.9 billion, while lower than $5.2 billion in the first quarter, was up compared with the $4.7 billion reported for the same period in 2021.

Net earnings reported for Freddie Mac's multifamily business was $285 million, a drop from the $387 million recorded in the first quarter and $824 million one year prior.