During the first quarter of 2016 Freddie Mac reported a net loss of $354 million. This was the second time in the last three quarters that Freddie Mac had lost at least that much. In contrast, Fannie Mae reported a net income of $1.1 billion for Q1 and a positive net worth of $2.1 billion as of March 31, 2016.
The Q2 2016 report from Freddie Mac and Fannie Mac come out this week on August 2 and August 4, respectively.
Reports from Freddie Mac stated that the loss in Q1 was due mostly to the effect of declining net interest rates, which resulted in an after-tax fair value loss of $1.4 billion; and the use of derivatives, which Freddie Mac uses as a hedge against changes in interest rates. The value of interest rate derivatives can fluctuate dramatically, however; Fannie Mae relies more on issuance of longer-term debt in order to protect itself against interest rate changes.
“It doesn't mean that there is anything wrong with doing a derivatives strategy,” said Steve Williams, principal with Cornerstone Advisors. “It's very prudent to do so. I don't think that Freddie Mac is the only one that was planning for rising rates by this time, which is almost halfway through 2016. We've actually seen rates go down, and that's that surprising sluggishness in our economy and worries about a global slowdown.”
The declining longer-term interest rates had a negative effect on Fannie Mae’s Q1 earnings even though it turned a profit; the $1.1 billion net income for Fannie Mae in Q1 was less than half of its Q4 2015 net income of $2.5 billion and a decline of more than half a billion year-over-year (from $1.9 billion in Q1 2015).
“We continue to run our business well while supporting the improving housing market,” said Timothy J. Mayopoulos, president and CEO of Fannie Mae. “The changes we have made to the company have put us in a stronger position to fulfill our responsibility to deliver safe, affordable mortgage financing for our customers, in all markets at all times. We will continue to execute on behalf of our partners, drive further improvements to housing finance and our company, and serve those who house America.”
Employment Summary for July 2016, Bureau of Labor Statistics, Friday, August 5
The headline number for the June jobs report from the Bureau of Labor Statistics—287,000 jobs created—was impressive, especially compared to May's dismal showing. But areas that are critical for housing, such as wage growth, still need work.
The industry will find out when the BLS releases the July 2016 Employment situation on Friday morning, August 5, if job gains can build on what June's report began—and if wage growth will be sufficient enough for housing to benefit.
The average hourly wage rose by only 2 cents in June up to $25.61 following a 6-cent hike in May, and average hourly earnings have increased by 2.6 percent since June 2015.
While the headline number of jobs created was impressive, Fannie Mae Chief Economist Doug Duncan noted, "Other report components are uninspiring. May’s job number was revised down, but the three-month moving average rose to 147,000 from 114,000 based on today’s release. The workweek was flat and the temporary worker hiring trend flattened. Wage growth edged up on its long climb toward long-term average. An increase of 414,000 people in the workforce raised the labor force participation rate one-tenth of a percent and increased the unemployment rate to 4.9 percent."
This week's schedule
Tuesday, August 2
Freddie Mac Q2 Financial Results
Wednesday, August 3
Nationstar Mortgage Q2 Financial Results
Thursday, August 4
Fannie Mae Q2 Financial Results
Friday, August 5
Employment Situation for July 2016, Bureau of Labor Statistics