On Thursday, Freddie Mac said that it would pay the US Treasury $4.5 billion dividend next month after reporting that its profit doubled in the previous quarter. The company continues to get ready for the likelihood of reporting zero capital by the coming year.
The mortgage finance giant has paid over $101 billion dividend to the Treasury after getting bailouts of $71.3 billion from the government during 2008 – 2012.
In the fourth quarter of 2016, this government-controlled mortgage company earned $4.8 billion when compared to $2.2 billion for the same period one year ago, as per a regulatory filing. The company said that the net interest income (including the charges imposed for ensuring mortgages) was $3.9 billion as against $3.6 billion.
After Donald Trump was elected as the President, this is the first earnings report of the company. Steven Mnuchin, the newly appointed Treasury Secretary, told that he is planning to handle the overhaul of Freddie Mac and Fannie Mae (its sister company), which have been under the control of the US since the year 2008.
What Mnuchin and Trump decide to do with these firms could have intense consequences for borrowers, private shareholders, and mortgage lenders, who have been battling for many years to get a share of the profits of the company.
Freddie purchases mortgages from many lenders, packs them into bonds, ensures them against default, and finally sells them to the investors. It doesn’t directly make loans to home purchasers.
Freddie’s earnings report along with that of Fannie is likely to be posted shortly.
The present operations of the company are mostly in line with the way in which it would act if it were under the shareholders’ control, Donald Layton (the CEO) told to the reporters. Many shareholders have revealed that Freddie and Fannie have been off-loading the credit risk of mortgages at low prices to the private investors over the last year, though Layton told Freddie would be following the same path if the firm was not under the control of the government.
Moving ahead, Freddie said it would be following a different method for accounting – hedge accounting to try to reduce the mismatch impact. This kind of accounting lets firms to marry up the modifications in the derivative values and hedged assets.
This is how Freddie and its sister company accounted for their hedges over a decade back till a scandal in accounting led the firms to huge earning restatements and shoved out many executives. This had led to several lawsuits and actions over the years that followed.
Layton said – “The financial services industry and accounting industry took what was an uncertain field back then and have done a good job on it, so this is a well-trod path.” He said that hedge accounting practices and methods had highly improved and were now more precise that what they were a decade back.