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Freddie Mac Reports Q3 Net Loss of Nearly Half a Billion Dollars

depleted-moneyFreddie Mac reported a net loss of $475 million for Q3 2015 in its 10-Q filing with the Securities and Exchange Commission on Tuesday, the first time the GSE has reported a quarterly net loss in four years. The good news is that Freddie Mac will not need another draw from the Department of Treasury to continue operations.

In the second quarter of 2015, Freddie Mac reported a net income of $4.2 billion. The Enterprise also reported a comprehensive loss in Q3 of $501 million, compared to a comprehensive income of $3.9 billion in the previous quarter. According to Freddie Mac CEO Donald Layton, the dropoff of $4.675 billion in net income from Q2 to Q3 is largely due to changes in interest rates that drove down the value of its derivatives (securities with a price derived from underlying assets—a contract between parties based on the assets, with the value of the contract determined by fluctuations in the underlying assets).

“For the first time in four years, Freddie Mac had a net loss in the most recent quarter,” Layton said. “This $0.5 billion loss was caused mainly by the accounting associated with our use of derivatives, whereby the derivatives are marked-to-market but many of the assets and liabilities being hedged are not. The resulting difference between GAAP (generally accepted accounting principles) reporting and the actual underlying economics, which has created significant GAAP income volatility in our quarterly financial statements, reduced the after-tax earnings in the quarter by an estimated $1.5 billion as interest rates declined significantly. In the prior quarter, we had the opposite result with a $1.5 billion positive contribution to earnings as rates rose significantly.”

The loss will not cause Freddie Mac to need another draw from Treasury since it was only a fraction of the $1.8 billion net worth reserve the Enterprise has under the Preferred Stock Agreement, according to Layton. The dividends paid into Treasury by Freddie Mac remained unchanged at $96.5 billion, which is about $25 billion more than the $71 billion the Enterprise received in a taxpayer-funded bailout in 2008.

Click here to see Freddie Mac's complete Q3 earnings report.

11-3 Freddie Mac graph

Freddie Mac's Q3 earnings breakdown

Dallas-based servicer Nationstar Mortgage Holdings on Tuesday reported adjusted earnings of $32 million and a quarterly net loss (for GAAP purposes) of $66 million. Nationstar reported a quarterly net income of $75 million in Q2, which followed a quarterly net loss of $48 million in Q1.

The company’s servicing segment achieved an adjusted pretax income of $36 million in Q3, which computes to 3.6 basis points of profitability based on average servicing during the quarter. For Nationstar’s originations segment, revenues increased sequentially during Q3 for the fifth straight quarter, up to $180 million.

During Q3, Xome sold more than 4,900 properties and ended the quarter with about 8,000 in its inventory, increasing third-party revenues to 34 percent of total revenue as Xome continues to diversify its revenue streams and client base, according to Nationstar.

"Our servicing segment delivered on our profitability goal by improving delinquency levels which resulted in higher base servicing fees and continued to focus on driving down expenses that have the most impact to our profitability,” said Jay Bray, CEO of Nationstar. “Our originations team also met its primary goal to replenish our servicing portfolio in a cost effective manner by funding $5 billion in mortgages, the highest volume since the fourth quarter of 2013. Furthermore, Xome continues to simplify real estate transactions by enabling buyers, sellers, and real estate professionals to successfully operate in the most efficient, transparent manner possible."

Click here to see Nationstar’s Q3 earnings statement.

11-3 Nationstar graph

Nationstar Q3 earnings breakdown

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.
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