Freddie Mac Reports Q4 Net Loss on Credit Guarantee Losses

Freddie Mac, #2 mortgage company in the U.S., reported a $480 million Q4 2006 net loss Friday morning, narrower than the $500 million loss it reported in Q3, and compared with net income of $684 million in Q4 2005. The results are preliminary; the company is in the midst of a three-year accounting overhaul. Freddie Mac pinned the losses on low bond yields and poor investment returns, saying losses "on the company's credit guarantee portfolio, derivatives and administrative expenses more than offset net interest income and management and guarantee income." Share prices have dropped over 8% in 2007 amid concerns over the subprime mortgage market. The company said last month it would stop buying subprime and high-risk mortgages. It said it would repurchase up to another $1 billion in its common stock, and issue up to $1 billion in preferred stock. On the year, FRE earned $2.2 billion ($2.84/share), up from last year's $2.1 billion ($2.75/share). Its mortgage credit risk remains low (LTV ratio of 57% vs. 56% for 2005); $238 billion of its $704 billion portfolio are non-agency mortgage-related securities, of which 96% are AAA or equivalent. Shares were down 0.75% Thursday to $62.24.

Sources: Press Release, Reuters, Bloomberg, TheStreet.com
Commentary: Subprime Fallout: Stocks to Eschew, Stocks to Pursue - Barron's • A Low-Risk Long/Short Financial Institution Arbitrage Strategy • Freddie Mac's Accounting Maze (FRE)
Stocks/ETFs to watch: Freddie Mac (FRE). Competitors: Fannie Mae (FNM)

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