Profit at mortgage giant Freddie Mac dropped almost 20 percent during the first nine months of the year compared with the year before, as the company absorbed nearly $200 million in losses because of hurricanes Katrina and Rita.
Increasing competition in the mortgage market, losses on derivatives, and the narrowing gap between short- and long-term interest rates also combined to push earnings down to $2.1 billion so far this year from $2.6 billion, company officials said in a preliminary statement of financial results. Freddie Mac and its larger rival Fannie Mae buy mortgages from lenders and package them into securities to sell to investors.
In the third quarter of the year alone, McLean-based Freddie Mac estimated a profit of $600 million, compared with a loss of $1.5 billion for the third quarter of 2004.
Company officials attributed the sharp increase in third-quarter profit to much smaller losses from derivatives, which are financial instruments the company uses to protect the value of its assets from interest rate changes.
Still, the results disappointed some analysts, who expected the losses from derivatives to be even smaller.
The figures released yesterday were not complete financial results. The company, which restated $5 billion in earnings two years ago following an accounting scandal, plans to release full third-quarter financial results at some point, though officials did not give a date. They added that the company remains on track to release full fourth-quarter and full 2005 results no later than the end of March.
"Given what has happened in the past, we want to be sure the numbers are absolutely correct before we give them to people," chief executive Richard F. Syron said yesterday during a conference call with analysts.
Freddie Mac officials recently intensified their review of internal controls after uncovering additional accounting errors caused by faulty software that had not been adequately tested. As a result of the accounting glitch, the company said earlier this month that it would have to reduce its profit for the first half of the year by $220 million.
Accounting issues also resurfaced this week at Fannie Mae, which last year was ordered to restate $10.8 billion in previously reported earnings after federal regulators found the company had violated accounting rules. In a monthly filing with the Securities and Exchange Commission, Fannie Mae disclosed that $6.67 billion in loans for single-family homes had been incorrectly coded as loans for multifamily properties. The error, however, will not have an impact on earnings, the company said.
Freddie Mac's third-quarter results included for the first time $190 million in losses stemming from hurricanes Katrina and Rita. That number may change, company officials said, but it was not likely to be affected by an extension on foreclosures in the Gulf Coast region that the company also announced yesterday.
Analysts were pleased that the company has been increasing its portfolio and has boosted its share of the mortgage market relative to Fannie Mae.
Freddie Mac also said it boosted its dividend to 47 cents, an increase of 34 cents, as the company returned to shareholders some of the capital it had built up under orders from its chief regulator.
"Overall, the solid capital position combined with the higher dividend and . . . portfolio growth should support solid core fundamentals for the company," Fox-Pitt, Kelton Inc. analyst Ed Groshans wrote yesterday in a research note.
Freddie closed at $63.55, up nearly 2 percent.