Freddie Mac, the bailed-out government-sponsored housing company, reported a sizable third-quarter profit Wednesday of $2.9 billion (PDF). The company was also able to a pay its $1.8 billion dividend to the U.S. Treasury on the sizable amount of preferred stock purchased by the taxpayer when it bailed out Freddie, and its sister company Fannie Mae, in 2008. Over the past four years, Freddie has drawn just over $71 billion from the taxpayer while paying back just under $22 billion in dividends.
Since the housing crash and its near bankruptcy, Freddie Mac has turned into a much more savvy, conservative company. The quality of the mortgages that it owns and guarantees are of a much higher quality than the junk it bought, securitized, and held as investments during the boom years. In a statement accompanying the results, Freddie CEO Donald Layton said “Freddie Mac’s strong financial performance this quarter was driven by favorable market conditions, including the continued improvement in the housing market, as well as our ongoing efforts to minimize losses on our legacy book.”
Freddie has also benefited from a housing market that started to revive late last year after contracting since 2007. New-home sales are up 27.1 percent over the year and the median home price has risen just above 10 percent from September of 2011 to September 2012. Data on housing starts, existing home sales, and home values are similarly impressive. What’s more, the job market has picked up. That means that more homeowners who have mortgages guaranteed or owned by Freddie and Fannie can make their mortgage payments on time. And since Freddie and Fannie substantially tightened loan standards following the crash, the quality of their newest mortgages is higher than their older ones.
The distinction between its pre- and post-crash mortgage book makes Freddie look like two entirely different companies. For guarantees of single-family mortgages, the core of the business of the two government-sponsored enterprises (GSEs), 60 percent of Freddie’s portfolio was originated in 2009 or later, 26 percent of the loan were made between 2005 and 2008, and the remaining 14 percent dates from 2004 and before. Of the loans purchased between 2005 and 2008, 8 percent had been made with down payments of 10 percent or less; in 2011-vintage mortgages, only 4 percent came with less than 10 percent down.
The average credit score for those loans has gone up 36 points from the 2005 to 2008 period to 2011. The delinquency rate for the mortgages made since 2009 is a tiny .73 percent. For mortgages originated between 2005 and 2008, by contrast, the delinquency rate is 9.38 percent. Some 88 percent of Freddie’s credit losses come from the 2005-2008 period. Only 3 percent of the company’s current credit losses stem from mortgages made since 2009, even though such loans account for well over half of the company’s loan portfolio.
Some of the differing performance of the mortgage portfolio is due to the fact that the older a mortgage is, the more likely it is to become delinquent. Also the low standards of the 2005-2008 period, not to mention the epochal crash in home values and the subsequent recession that made it very difficult for homeowners to stay current on their mortgages, will not repeated anytime soon.
But the earnings also reflect a real change in standards. And over time, as loans made in the 2005-2008 period are refinanced, paid off, or defaulted, more and more of Freddie’s mortgage portfolio will be made up of more recent, higher-quality loans. As the portfolio becomes healthier, the company’s balance sheet will improve. More and more of the company’s profits can be remitted to the U.S. taxpayer, which will come closer to being made whole on its sizable investment.
The distinction between the pre- and post-crash mortgage book makes Freddie look like two entirely different companies.
When Freddie (along with its sister company Fannie Mae, which has not reported its third-quarter earnings yet) came under the conservatorship of the Treasury, it was required to pay a 10 percent dividend every quarter, whether or not it could afford it. Since the GSEs had an open funding line, Freddie often took money from the Treasury in order to pay it back. Starting in 2013, that practice will end, and the GSE’s will simply remit all their profits to the taxpayer in the hope of narrowing the spread between their total dividend payments and their taxpayer support.
So far both companies have received a combined $187 billion from the Treasury and given back about $47 billion in dividend payments. As the housing market improves and the GSEs standards stay tight, the second number should start to grow steadily higher. The taxpayer will likely not be made whole on its “investments” in Fannie Mae and Freddie Mac. But four years after the government came riding to the GSEs rescue, we can finally draw a line on the taxpayers’ housing liability.