Freddie Mac Posts $2.3 Billion Profit After Loss Year Earlier

(Bloomberg) -- Freddie Mac, the U.S.-controlled mortgage firm, posted a profit of $2.3 billion in the third quarter after avoiding derivative losses it's experienced in the past.

The company, which was seized along with Fannie Mae during the 2008 financial crisis, will send the Treasury Department $2.3 billion at the end of December, bringing the total amount returned to $101.4 billion, according to a regulatory filing Tuesday.

Freddie Mac had posted a loss of $475 million in the third quarter of 2015 stemming mostly from accounting for hedges against interest-rate risk. The company uses derivatives to hedge away the impact of rising and falling rates on its holdings. But because the company values the derivatives at a different time than it values the hedged assets, in prior quarters that's resulted in large swings in profits.

Under the terms of Fannie Mae and Freddie Mac's bailout agreement, the companies have to send almost all profits to the government. The payments count as a return on the U.S. investment and not as repayment of the aid, leaving no existing mechanism for the mortgage giants to exit government control. Freddie Mac took $71.3 billion in assistance.

Freddie Mac's net-interest income, which includes the fees that the company charges to guarantee mortgages, was $3.6 billion in the third quarter, compared to $3.7 billion a year earlier.

Credit Losses

Freddie Mac CEO Donald Layton said during a call Tuesday with reporters that the company remained focused on reducing the risk of needing a future taxpayer bailout. Rising home prices have in part helped to reduce delinquency rates to their lowest levels since before the crisis.

Still, the company made a provision of $113 million for credit losses, reflecting in part a higher expectation of mortgage defaults as other companies report stress in other types of consumer loans, such as credit cards and autos.

Freddie Mac and Fannie Mae don't make loans. They buy them from lenders, wrap them into securities and guarantee to investors payment of principal and interest.

Small lenders and affordable housing groups have called on the Federal Housing Finance Agency, Freddie Mac and Fannie Mae's regulator, to allow the mortgage companies to retain more capital.

Under the current terms of the companies' bailouts, their capital buffers, which now stand at $1.2 billion each, will wind down to zero dollars by 2018. That would mean that even a small loss would require another injection from taxpayers, with an allocation of $258 billion left to draw from between the two companies.

Fannie Mae is scheduled to report earnings on Thursday.

To contact the reporter on this story: Joe Light in Washington at jlight8@bloomberg.net. To contact the editors responsible for this story: Jesse Westbrook at jwestbrook1@bloomberg.net, Alexis Leondis, Gregory Mott