Freddie Mac earnings slip due to credit provision

Freddie Mac’s third quarter earnings slipped 55% compared with the previous year as the company elected to take a $1.8 billion provision for potential credit losses due to deteriorating single-family housing conditions.

Because of that decision, the government-sponsored enterprises’ net income was $1.3 billion, down from $2.5 billion in the second quarter and $2.9 billion for the third quarter of 2021.

Strong risk management is especially important in the current economic environment of rising interest rates and falling home prices, CEO Michael DeVito said during the earnings call.

“To that end, I note that our risk metrics and current portfolio characteristics are very solid,” DeVito said. “Single-family delinquencies are as low as they’ve been since the start of the pandemic, and multifamily delinquencies remain low compared with other market participants.”

While Freddie Mac remains undercapitalized, even with lower net income, Freddie Mac was able to increase its net worth to $35 billion as of Sept. 30, a 39% year-over-year increase, Chief Financial Officer Christopher Lown reported.

“The most recent Dodd-Frank Act stress test confirmed that Freddie Mac has sufficient retained earnings today to weather a hypothetical severely adverse economic scenario,” DeVito added.

But net revenues of $5.18 billion were just $223 million lower than the second quarter’s $5.4 billion and $66 million lower than the $5.25 million one year ago.

“This decline was largely driven by a $202 million decline in noninterest income due to lower guaranteed income and a decrease in net investment gains in our multifamily business,” Lown said. “This was partially offset by a $136 million increase in net interest income, driven in part by continued mortgage portfolio growth and higher average portfolio guarantee fee rates.”

Single-family new business activity fell to $121 billion from $138 billion in the previous quarter and $299 billion one year prior. However on a quarter-to-quarter basis, purchase mortgage acquisitions increased to $98 billion from $86 billion. For the third quarter of 2021 Freddie Mac bought $132 million of purchase mortgages.

Segment net income was just $843 million, compared with $2.2 billion in the second quarter and $2 billion one year prior. The decline was due to the credit provision, Lown said.

However, as DeVito noted, segment delinquencies remained extremely low. Seriously delinquent loans made up just 67 basis points of Freddie Mac’s single-family portfolio, down from 76 basis points at the end of the second quarter and 146 basis points one year prior.

Still, Freddie Mac increased its net allowance for loan losses for the single-family portfolio by 35% to $7.2 billion from $5.3 billion in the prior quarter.

“Our single family allowance for credit losses coverage ratio increased to 23 basis points from 17 basis points in the prior quarter,” Lown said. “The increase in our allowance for loan losses was predominantly driven by our third quarter house price appreciation forecast, which now forecasts a 6.7% increase in 2022 and a 0.2% decline in 2023.”

That’s a change from the second quarter outlook, which called for a 12.8% rise this year and a 4% increase next year, Lown continued.

Multifamily net income increased to $470 million from $285 million for the second quarter, although it was down from $891 million one year ago.

Freddie Mac also announced Ravi Shankar is returning to the company as senior vice president and head of Single-Family Portfolio and Servicing. In this position, Shankar will have broad responsibility over portfolio management, servicing and the operations and technology that support these activities.

Previously he was Freddie Mac’s senior vice president for Single-Family Portfolio Management from 2013 to 2016 and deputy head of Investments and Capital Markets from 2016 to 2019.

Most recently, Shankar was a senior advisor at Boston Consulting Group and United Wholesale Mortgage. He is also a former Chase Home Finance chief financial officer, head of capital markets and portfolio manager.