WASHINGTON – Mortgage giant Freddie Mac reported a $475 million net loss for the third quarter due to losses it sustained on the investments it uses to hedge against swings in interest rates.
The government-controlled company said Tuesday the July-through-September loss mainly reflected accounting measures, while its business was strong and continued to improve. The loss compared with net income of $2.1 billion in the same period of 2014. It broke a streak of 15 straight profitable quarters.
The company, based in McLean, Virginia, won’t pay a dividend to the U.S. Treasury next month. Freddie previously has paid $96.5 billion in dividends, exceeding its government bailout of $71 billion.
The government rescued Freddie and larger sibling Fannie Mae at the height of the financial crisis in September 2008, after they suffered huge losses from risky mortgages in the housing market bust.
Together the two companies received taxpayer aid totalling about $187 billion. The housing market’s gradual recovery has made Freddie and Fannie profitable again.
At the same time, the companies have been whittling down their mortgage holdings and transferring risky loans to the private market, away from taxpayers — a trend that is likely to reduce their revenue.
The head of the federal agency that oversees Fannie and Freddie raised the possibility that future quarterly losses could mean they would have to receive further government aid.
Volatile interest rates and reduced capital cushions for the two companies, under their agreements with the government, “will likely make both enterprises increasingly susceptible to the possibility of quarterly losses that could result in draws” from the Treasury, Mel Watt, director of the Federal Housing Finance Agency, said in a statement Tuesday.
Watt noted that Freddie’s third-quarter loss wasn’t due to a deteriorating risk profile of mortgages or an increase in losses related to repayment risk, but rather to volatility in interest rates as reflected in accounting. “Freddie Mac continues to fulfil its obligations to support the housing finance market, and provide liquidity and access to mortgage credit,” Watt said.
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 per cent 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 third-quarter loss was attributed largely to accounting losses from derivatives, financial transactions that the company uses to hedge against swings in interest rates. Freddie reported derivatives losses of $4.2 billion in the July-September quarter, widened from about $600 million a year earlier.
A plan to phase out Fannie and Freddie and instead use mainly private insurers to backstop home loans advanced in the Senate last year and was endorsed by the White House. The plan would create a new government insurance fund. Investors would pay fees in exchange for insurance on mortgage securities they buy, and the government would become a last-resort loan guarantor. No work on the proposal has been done this year in the current Congress.
The prospect of possible losses for Fannie and Freddie “is another reminder that comprehensive housing-finance reform is necessary,” Treasury Department spokesman Rob Runyan said in a statement. “Taxpayers remain on the hook for losses incurred” by the companies.
This story has been corrected to show that the amount of Freddie Mac’s third-quarter derivatives losses was $4.2 billion, not $1.5 billion.