Freddie Mac Profit Drops 28% on Katrina, Accounting Costs

"We need to keep earning your confidence," chief executive Richard F. Syron told analysts who follow Freddie Mac. (By Chitose Suzuki -- Associated Press)

Freddie Mac reported a 28 percent drop in profit for 2005, compared with 2004, because of costs related to its $5 billion accounting scandal, Hurricane Katrina and accounting changes.

The McLean mortgage finance company, which is still struggling to rebuild its bookkeeping systems, reported a profit of $2.13 billion ($2.75 per share) for 2005, compared with $2.94 billion ($3.94) for 2004.

Though delayed by two months, the release of the 2005 results was another step in the company's efforts to put its accounting problems behind it. Last month, it agreed to pay $220 million to settle shareholder lawsuits and a $3.8 million fine to settle charges that it violated campaign finance laws. The company hopes to resume timely financial reporting with its full-year 2006 results.

Freddie Mac remains under investigation by the Securities and Exchange Commission and the Justice Department.

"We need to keep earning your confidence," chief executive Richard F. Syron told analysts in a conference call.

Company officials attributed much of the decline in profit to several one-time expenses, such as the $220 million to settle shareholder lawsuits.

It also had $133 million in charges related to Hurricane Katrina, less than the original estimate of $190 million, and it wiped out another $265 million in earnings because of accounting changes and corrections.

Administrative expenses for 2005 were flat, at $1.5 billion. Freddie Mac managers said they hope to decrease administrative expenses relative to the rest of its business.

A shareholder-owned company chartered by Congress to promote homeownership, Freddie Mac buys mortgages from banks and other lenders and packages them into securities for sale to investors.

Freddie Mac earns interest on mortgages and securities it holds for investment purposes and also charges investors in its mortgage-backed securities a fee to guarantee timely repayment of the underlying loans.

Freddie Mac's investment portfolio, the company's main source of profit, grew at an annualized rate of 8.7 percent to $710 billion in 2005. But interest income decreased in part because of shifts in interest rates.

Congress is considering curtailing the growth of the investment portfolios of Freddie Mac and its rival Fannie Mae, which had to erase $10.6 billion in previously reported earnings because of bad accounting. Last week, after the companies' chief regulator, the Office of Federal Housing Enterprise Oversight issued a report accusing Fannie Mae's former management of earnings manipulation, Fannie Mae agreed temporarily not to increase its portfolio beyond $727 billion.

Asked how Freddie Mac might deal with a similar cap, Syron said he had had only "preliminary" talks with the new OFHEO director, James B. Lockhart III, and "at this very early date we have not yet looked at ways we would adapt to the hypothetical."