Freddie Mac, the U.S.-owned mortgage finance company, on Wednesday said its second-quarter profit surged 65 percent to $5.0 billion, its second-largest ever, as rising home prices limited credit losses and it booked big gains on derivatives that benefited from rising interest rates.
Freddie Mac, which has operated under federal conservatorship since it was seized in 2008 during the financial crisis, also said that based on a company net worth of $7.4 billion, it will make a $4.4 billion dividend payment to the U.S. Treasury for its rescue aid.
Meanwhile, the company continued to hold off on writing-up $28.6 billion in tax assets, an accounting move that would dramatically increase its remittance to the U.S. Treasury. Company officials said on a conference call they would determine whether to mark up some or all of the so-called deferred tax assets within the next two quarters.
Freddie's larger sister, Fannie Mae <FNMA.OB>, already booked a comparable allowance in the first quarter, triggering a massive dividend to the Treasury of $59.4 billion, most of which was attributable directly to the accounting gain.
For the second quarter, Freddie's net income rose to $5.0 billion, from $3.0 billion a year earlier. It was up 9 percent from the first quarter's $4.6 billion, putting the company on track for record annual profitability.
Lifting the results were a $1.4 billion gain on interest rate swaps that profited from the rise in interest rates during the quarter. The yield on the benchmark 10-year U.S. Treasury Note, to which mortgage rates are tied, rose 1.05 percentage points in the second quarter on fears that the U.S. Federal Reserve may soon scale back its massive stimulus program, called quantitative easing.
The Fed is buying $85 billion a month in Treasuries and mortgage-backed securities backed by Freddie and Fannie, a program that had driven interest rates on mortgage loans to record lows earlier this year.
The Mortgage Bankers Association on Wednesday reported the average rate for a 30-year, fixed-rate mortgage rose to 4.61 percent in the latest week, from 4.58 percent the week before. Rates were below 3.6 percent in early May and had been below 3.5 percent back in December.
The return to profitability of Freddie and Fannie in the last two years has largely occurred on the back of a continuing housing market recovery, marked by rising home prices and falling mortgage delinquencies.
Freddie Mac, whose formal name is Federal Home Loan Mortgage Corp, is required to pay everything above $3 billion to the Treasury in return for taxpayer aid under existing bailout terms. Combined, Freddie Mac and Fannie Mae have received $187.5 billion in assistance since they were seized amid losses on soured loans that pushed them toward insolvency.
The two companies have paid nearly $132 billion in dividend payments. Freddie expects to pay the Treasury the $4.4 billion dividend payment by September, bringing Freddie's total to roughly $41 billion.
The debate over how to restructure Fannie Mae and Freddie Mac, along with the broader mortgage market, has kicked off in Congress. President Barack Obama on Tuesday said he wants a smaller federal role in the housing finance system. Any new structure is expected to take years, as lawmakers dismantle and replace the firms.
Their return to profitability, and transformation into a major source of revenue for the federal government, has also fueled the debate about their future, analysts said.
"There's no question in my mind that the big profits that both Fannie and Freddie are generating are in some sense affecting the debate," said Lewis Alexander, chief U.S. economist at Nomura Securities in New York.
"I think everybody in the mortgage business kind of understands that the current state of affairs is not credible in the long run, and to some extent the profits that Fannie and Freddie are producing are evidence of that."
Both companies have said they expect to remain profitable. The reversal of fortune has led speculators to bet that the companies might repay their debt to taxpayers and exit government control. Investors have snapped up the preferred shares of the companies. Housing groups have also called for Fannie and Freddie to start paying into a government trust fund to support affordable housing.
Fannie Mae, which has yet to report its second-quarter results, made a large payment to the Treasury after concluding that it needed to reverse write-downs of tax assets that led to billions of dollars in losses when they were written down.
Fannie posted a net income of $58.7 billion in the first quarter, mainly due to the one-time $50.6 billion gain related to the tax assets. The company also reported a pretax income of $8.1 billion for the quarter, which compared to a $2.7 billion profit in the same three months a year earlier.