Freddie Mac Takes Fourth Quarter Loss

Freddie Mac, the No. 2 U.S. mortgage finance company, reported a fourth-quarter net loss on Friday as a decline in long-term interest rates affected the value of its loan assets.

For full-year 2006, net income increased to $2.2 billion, or $2.84 per share. from $2.1 billion, or $2.75 a share, but the company took a $1.03 billion charge during the second half of 2006.

The subprime/bad credit mortgage market is heading for a meltdown, with some major lenders defaulting on current financial agreements. The company posted fourth-quarter net loss of $480 million versus a profit of $684 million in the last three months of 2005.

The latest results were preliminary as the company has not released timely financial reports since an accounting scandal in 2003. Freddie has said it plans to return to timely financial reporting in the first half of this year.

Its business is sensitive to interest rate fluctuations, and executives have said that returns would be weighed down by a decline in long-term home mortgage rates that has followed the Federal Reserve’s decision to keep interest rates on hold since an increase in June.

Higher interest rates reduce the chances that owners will prepay their mortgages and so preserve the value of Freddie’s assets.

Uneven earnings over the year was “a tale of two cities,” said Eugene McQuade, the chief operating officer.

“The first half of the year, [interest rates] were favorable. The second half, they worked against us. For the year they balanced out relatively well,” McQuade said.

Subprimes fail to shake mortgage rates
For all of 2006, Freddie’s mortgage guarantee business grew by 10.6 percent to about $1.5 trillion.

The growth came despite a “challenging year for housing and mortgage finance,” Richard Syron, the chief executive, said.

The housing finance sector has been shaken in recent weeks with increased mortgage delinquencies, particularly among high-risk subprime borrowers. Delinquencies have helped drive over twenty subprime mortgage lenders out of business.

The company boosted administrative and technology spending by $100 million in 2006 to upgrade internal controls. Freddie Mac is under regulatory scrutiny and continues to improve internal controls after its accounting problems.

The company plans to repurchase up to an additional $1 billion in common stock in conjunction with an issuance of up to $1 billion in preferred stock.

SOURCE: CNN Money