Shares of Federal Home Loan Mortgage Corporation FMCC or Freddie Mac rose 5.99% following impressive second-quarter 2015 results. The company reflected its 15th consecutive quarter of positive earnings with net income of $4.2 billion, significantly up from $524 million in the prior quarter.
Results were positively driven by higher net interest income and derivative gains. Moreover, benefit for credit losses was a positive. However, elevated non-interest expenses were a concern.
Performance in Detail
Net interest income increased 8.8% sequentially to $4.0 billion. Net interest yield stood at 0.82%, up 7 basis points sequentially. Elevated amortization income due to increased prepayments aided the rise.
Derivative gains were $3.1 billion compared with losses of $2.4 billion in the prior quarter. Increased interest rates and reversal in some of the losses from prior quarters, which resulted from declining interest rates, drove the gains.
Further, non-interest expense came in at $1.3 billion, up 8.3% sequentially, mainly due to higher administrative expenses.
Freddie Mac reported benefit for credit losses of $857 million in the quarter, up 72% sequentially. Huge benefit from the reclassification of certain seriously delinquent single-family mortgage loans from held-for-investment to held-for-sale primarily led to the increase.
Furthermore, segment-wise, on a sequential basis, Single-family Guarantee and Investments segment recorded a significant rise in earnings, while Multifamily segment’s earnings rose 66.5%.
Based on net worth of $5.7 billion (including capital reserve of $1.8 billion), Freddie Mac’s dividend obligation to the Treasury will stand at $3.9 billion in Sep 2015. Notably, including this dividend obligation, the company’s aggregate cash dividends paid to the Treasury will total $96.5 billion.
Further, since Jan 1, 2009, Freddie Mac provided $2.7 trillion of liquidity to the mortgage market, which helped fund 11.7 million single-family homes and 2.3 million units of multifamily rental housing. Moreover, the company helped about 1.1 million borrowers to avoid foreclosure.
Credit Quality
As of Jun 30, 2015, Freddie Mac’s new single-family book (loans acquired after 2008, excluding HARP and other relief refinance mortgages) was 63% of the UPB of Freddie Mac’s single-family credit guarantee portfolio, while HARP and other relief refinance loans accounted for 19% of the portfolio.
Further, Freddie Mac’s 2005-2008 legacy single-family book continued to decline. As of Jun 30, 2015, the book represented 12% of the portfolio.
Our Viewpoint
Though Freddie Mac suffered losses during the crisis of 2008-2009 and had to be bailed out by the government, it managed to turn itself into a profitable organization supported by stable recovery in the housing market.
Though higher expenses were a concern, we believe that Freddie Mac’s settlements will yield profitability in the coming quarters.
Currently, Freddie Mac carries a Zacks Rank #2 (Buy).
Other finance companies worth considering include Essent Group Ltd. ESNT and Walker & Dunlop, Inc. WD, with a Zacks Rank #1 (Strong Buy), while Ocwen Financial Corp. OCN carries a Zacks Rank #2 (Buy).
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