Freddie Mac to Send $2.2 Billion Dividend to Treasury

By Austen Hufford Features Dow Jones Newswires

Mortgage-finance company Freddie Mac said it would send a $2.2 billion dividend payment to the U.S. Treasury, as the company posted a smaller impact from interest rates and spreads than in previous quarters.

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Freddie reported a first-quarter profit of $2.21 billion, compared with a loss of $354 million in the same quarter last year.

The price of Freddie's portfolio, as with that of all bonds, rises and falls as interest rates change. The company uses derivatives in an effort to counteract that effect, but because of accounting rules, the derivatives can make large profits or losses appear over short periods.

However, in the period, the effect was minimal as interest rates and spreads didn't change significantly. The company said it saw one of the smallest market-related moves in income in the past three years.

The Federal Reserve increased its benchmark interest rate in March and said it would keep lifting rates this year.

Freddie also had a near-zero impact from net interest-rate effects and a $100 million gain from market spreads. In the latest quarter, Freddie recorded a derivatives loss of $300 million.

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The company took a $116 million benefit for credit losses, meaning the company is reducing the amount it sets aside for bad loans. It had a $467 million benefit in the year-ago quarter and a provision of $326 million in the fourth quarter.

Net interest income rose 12% to $3.8 billion.

Amid improvement in the housing market, Freddie saw its serious delinquency rate continue to improve, reaching 0.92%, the lowest level since 2008.

Freddie and mortgage-finance firm Fannie Mae were put into a so-called conservatorship under government control during the 2008 financial crisis.

Because its net worth of $2.8 billion was more than its capital buffer of $600 million, Freddie will send a $2.2 billion dividend to the Treasury for the quarter. It also didn't need a capital infusion because total equity remained positive, growing to $2.83 billion from $1 billion in the prior year's quarter.

Under the terms of the bailout, the companies must send nearly all of their profits to the government in the form of dividends, except for a declining capital buffer. Its buffer will be zero starting next year. As the capital buffer disappears, derivatives accounting could cause Freddie to require a injection of capital from the Treasury.

Freddie and Fannie have been caught between shareholders, civil-rights groups and some small lenders who want to see them freed from government control. A capital injection from the Treasury, which hasn't happened since before 2013, could bring new attention to the issue.

In all, after the quarter's dividend, the company will have sent $108.2 billion to the Treasury, compared with the $71.3 billion infusion it has received.

Fannie and Freddie don't make loans. Instead they buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.

Write to Austen Hufford at austen.hufford@wsj.com

(END) Dow Jones Newswires

May 02, 2017 09:25 ET (13:25 GMT)