Freddie Mac Profit Down 45 Percent in 2Q
Thursday August 30, 8:40 am ET
By Alan Zibel, AP Business Writer
Freddie Mac Reports 45 Percent Drop in Second-Quarter Profit Due to Bad Loan Provision
WASHINGTON (AP) -- Freddie Mac, the nation's second-largest buyer and guarantor of home mortgages, said Thursday its second-quarter profit fell 45 percent as it had to record larger provisions on its books for bad loans.
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The government-sponsored company, which is returning to normalcy after an accounting scandal four years ago, said it earned $764 million, or $1.02 per share, for the three months ended June 30. That contrasted with profit of $1.4 billion, or $1.93 a share, a year ago.
Revenue rose 4.8 percent to $2.26 billion from $2.15 billion in the quarter a year ago. Freddie Mac makes money from interest payments on mortgages it holds on its books and earns fees from insuring mortgages sold to investors.
The McLean, Va.-based company said it recorded a $320 million provision for credit losses in the second quarter due to problems with loans originated this year and last year, amid a deepening mortgage crisis nationwide that has bankrupted more than 50 lenders.
The earnings results missed Wall Street expectations, with analysts surveyed by Thomson Financial expecting a profit of $1.16 per share on revenue of $1.69 billion for the quarter.
Freddie Mac, and its larger government-sponsored sibling Fannie Mae, were created by Congress to pump money into the $8 trillion home-mortgage market by buying home loans from banks and other lenders and bundling them into securities for sale on Wall Street.
Nationwide, foreclosures and delinquencies have surged in recent months, particularly among homeowners who took out high-risk mortgages.
Richard F. Syron, Freddie Mac's chief executive, said in a statement that the company sees weakening credit trends. But, he said the company is "well positioned relative to the overall marketplace to weather the ongoing disruptions in the mortgage markets and emerge as an even stronger player."
Freddie and Fannie are generally seen as more cautious than the lenders catering to borrowers with weak credit that have collapsed this year. Nevertheless, Freddie Mac's total credit-related expenses jumped by 74 percent in the second quarter to $336 million from $193 million a year earlier.
Democrats in Congress want to raise the individual limit for home mortgages that Fannie and Freddie are allowed to buy as a way to help stabilize the troubled mortgage market.
It is now at $417,000, well below the median home price in many areas, especially in New England, the mid-Atlantic and in California.
This month, rates on mortgages that cannot be sold to Fannie and Freddie have soared, as lenders have demanded a premium for all but the safest mortgages.
Freddie Mac disclosed in mid-2003 that it had misstated earnings by some $5 billion -- mostly underreported -- for 2000-2002, and its top executives were ousted. Freddie Mac paid a then-record $125 million civil fine in 2003 in a settlement with federal regulators, who blamed management misconduct for the faulty accounting.
During the turmoil that has rippled through the markets in the last month, we heard plenty about the dangers to the global economy posed by the wild, unregulated new players – the hedge funds trading exotic and untested financial instruments.
And yet, paradoxically, the biggest risk to the stability of the financial system has turned out not to be any of the hedge funds or traders of complex derivatives at the main investment banks. Rather, the real threat has come from the old-style, state-controlled banks of mainland Europe and Asia. If there is one lesson to be drawn from the so-called credit crunch, it is that the further the state stays away from the banking system, the better it will work.
Worst hit has been the hitherto obscure Landesbank Sachsen Girozentrale, a state-owned bank based in Leipzig. Germany's state-owned regional saving banks had to get together earlier this month to extend E17bn (£11bn, $23bn) of emergency funding to Sachsen as it ran into difficulties over its exposure to sub-prime. ..............
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