Freddie Mac earnings rise as other gains offset drop in new business

Freddie Mac’s first-quarter earnings soared due to interest-rate hedging, net portfolio and investment gains, higher average single-family mortgage guarantee fees and a credit-reserve release that collectively offset declines in single-family refinance loan purchases and the multifamily division.

The government-sponsored enterprise, one of two that backs a significant number of mortgages in the United States, reported $3.8 billion in net income for the period, up more than 35% from $2.7 billion in the fourth quarter of 2021 and nearly $2.8 billion a year earlier.

Whether such gains will continue could depend in part on home price appreciation that is expected to moderate but not reverse.

“Supply imbalance is having a major influence on price growth and is likely to be with us for some time,” said CEO Michael DeVito in an earnings call.

Freddie recognized a more than $800 million benefit for credit losses based on home price strength in the first quarter. Over that period, its single-family delinquency rate fell below 1% for the first time in almost two years, leaving it slightly above its level before the coronavirus arrived in the U.S. The multifamily delinquency rate also has fallen close to the level seen prior to the pandemic.

Single-family credit risk transfer activity, which recently got a boost from a shift in Federal Housing Finance Agency policy, was used heavily during the quarter. Freddie’s flagship Structured Agency Credit Risk product set records during the period, DeVito said.  

The gains in the single-family division from the credit benefit, higher average g-fees portfolio activity, hedging and investments contributed to an increase in net revenues for this category, which rose to $5.21 billion from $4.70 billion the previous quarter and $3.85 billion a year ago. 

The single-family division’s unpaid principal balance of loans fell to $207 billion from $270 billion the previous quarter and $362 billion a year earlier as rates rose, diminishing refinancing opportunities. Refis dropped to $114 billion in the first three months of this year, compared to $160 billion the previous quarter and $273 billion during the same period in 2021. In March, refinances purchases by Freddie totaled $35.3 billion, roughly on par with February’s $34.9 billion but down considerably from $103.3 billion a year earlier

However, Freddie’s outstanding single-family portfolio grew as runoff decreased, increasing to nearly $2.89 trillion from $2.79 trillion the previous quarter and almost $2.46 billion a year earlier. The average single-family g-fee during the quarter was 47 basis points. That amount was up 2 basis points from a year earlier.

The gains in single-family income offset declines in multifamily, where net revenues fell to $632 million from $863 million the previous quarter and $1.42 billion a year earlier. 

“This decline was primarily driven by lower investment gains due to spread widening, lower initial pricing margins on new loan purchases, and lower guarantee fee income,” Chief Financial Officer Chris Lown said during the earnings call.

Overall, Freddie Mac’s net worth during the quarter rose to $31.7 billion up 69% from the first quarter of last year.