Freddie Mac's Timely Filing Reveals a Loss

By David S. Hilzenrath
Washington Post Staff Writer
Saturday, March 24, 2007

Freddie Mac, still fixing weaknesses that came to light in 2003, yesterday issued its first timely annual report in five years, which showed that the giant mortgage funding company lost $480 million in the fourth quarter. That compared with a profit of $684 million in the comparable period a year earlier.

The loss was largely a reflection of declines in the value of financial instruments known as derivatives that Freddie Mac uses to hedge against movements in interest rates.

Last year Freddie Mac earned $2.2 billion ($2.84 a share), up 3.8 percent from $2.1 billion ($2.75) in 2005 -- largely the result of increases in the value of derivatives during the first half of the year. Revenue declined to $5.2 billion from $5.6 billion in 2005.

In a conference call with Wall Street analysts and in the annual report, Freddie Mac outlined several signs of weakness in the housing and mortgage markets.

"Families are finding it hard to stay in their homes as deteriorating house prices, regional job losses and increasing mortgage payments are making their homes less affordable," chairman and chief executive Richard F. Syron said in a prepared statement.

Last year, Freddie experienced a slight deterioration in the creditworthiness of loans "as more loans transitioned through delinquency to foreclosure" and as "the expected severity of losses" on individual homes increased, the company said.

The company increased its reserves for potential loan losses to $420 million as of Dec. 31, from $414 million the year before.

The hike would have been greater if Freddie Mac had not reduced reserves for damage related to Hurricane Katrina. After putting $128 million in reserve in 2005 to cover anticipated losses from Katrina, the company reduced that reserve last year to $46 million.

Freddie Mac has been an active buyer of some of the non-traditional mortgages that were part of a general loosening of lending terms in recent years. Loans that allow the borrower to pay only interest for a time, without reducing principal, accounted for 16 percent of the company's mortgage purchases in 2006, a total of $58.2 billion, the report said.

Syron cited the release of yesterday's report as a sign of progress in the company's efforts to fix its bookkeeping, but he conceded in a letter to shareholders that the company fell short of its goals last year for improving internal controls and financial reporting systems. "There's no question this has taken longer than any of us expected," he wrote. The problems have limited the company's ability to market new products, according to the annual report.

The company predicts it will get its quarterly financial reporting on track again during the second half of this year.

Freddie, which was chartered by the government to promote homeownership, also disclosed that it fell slightly short of one of the affordable housing quotas the government requires. The law gives Freddie a chance to submit a plan for coming into compliance before the shortfall could trigger enforcement action.

Freddie reported that the delinquency rate on its single-family home mortgages -- the percentage of loans at least 90 days past-due or in foreclosure -- declined to 0.53 percent last year, from 0.69 percent the year before.

There were also less favorable developments. The company lost $126 million last year on loans it had to repurchase from other investors because they were late 120 days or more. In 2005, there were no such losses, spokesman Michael Cosgrove said.

© 2007 The Washington Post Company