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Freddie Mac Reports Operating Results (10-Q)

August 09, 2010 | About:

Freddie Mac (FRE) filed Quarterly Report for the period ended 2010-06-30.

Freddie Mac has a market cap of $220.7 million; its shares were traded at around $0.34 .

Highlight of Business Operations:

We had a net loss attributable to Freddie Mac of $4.7 billion for the three months ended June 30, 2010, reflecting the ongoing adverse conditions in the U.S. mortgage markets. Total equity (deficit) was $(1.7) billion at June 30, 2010. The $1.7 billion deficit was primarily driven by our net loss of $4.7 billion and the $1.3 billion dividend payment to Treasury on the senior preferred stock during the second quarter of 2010. These items were partially offset by a $4.1 billion decrease in unrealized losses related to available-for-sale securities recorded in AOCI during the second quarter of 2010. To address the deficit in our net worth, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury for $1.8 billion in funding under our Purchase Agreement with Treasury. Following receipt of the draw, the aggregate liquidation preference on the senior preferred stock owned by Treasury will be $64.1 billion.

In June 2009, the FASB issued two new accounting standards that amended the guidance applicable to the accounting for transfers of financial assets and the consolidation of VIEs. Effective January 1, 2010, we adopted these new accounting standards prospectively for all existing VIEs. The adoption of these two standards had a significant impact on our consolidated financial statements and other financial disclosures beginning in the first quarter of 2010. As a result of the adoption, our consolidated balance sheets reflect the consolidation of our single-family PC trusts and certain of our Structured Transactions. This consolidation resulted in an increase to our assets and liabilities of $1.5 trillion and a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion.

Net income (loss) attributable to Freddie Mac was $(4.7) billion and $0.3 billion for the second quarters of 2010 and 2009, respectively. Key highlights of our financial results for the second quarter of 2010 include:

During the second quarter of 2010, we identified a backlog related to the processing of certain foreclosure alternatives reported to us by our servicers, principally loan modifications and short sales. This backlog was the result of a significant increase in the volume of foreclosure alternatives executed by servicers beginning in 2009, which placed pressure on our existing loan processing capabilities. This backlog in processing loan modifications and short sales resulted in erroneous loan data within our loan reporting systems, thereby impacting our financial accounting and reporting systems. The resulting error impacts our provision for credit losses, allowance for loan losses, and provision for income taxes and affects our previously reported financial statements for the interim period ended March 31, 2010 and the interim 2009 periods and full year ended December 31, 2009. Based upon our evaluation of all relevant quantitative and qualitative factors related to this error, we concluded that this error is not material to our previously issued consolidated financial statements for any of the periods affected and is not material to our estimated earnings for the full year ending December 31, 2010 or to the trend of earnings. As a result, in accordance with the accounting standard related to accounting changes and correction of errors, we have recorded the cumulative effect of this error as a correction in the second quarter of 2010 as an increase to our provision for credit losses. The cumulative effect, net of taxes, of this error corrected in the second quarter of 2010 was $1.2 billion, of which $0.9 billion related to the year

Under the terms of the Purchase Agreement, the UPB of our mortgage-related investments portfolio calculated as discussed below may not exceed $810 billion as of December 31, 2010 and this limit will be reduced by 10% each year until it reaches $250 billion.

Under the December 2009 amendment to the Purchase Agreement, the $200 billion maximum amount of the commitment from Treasury will increase as necessary to eliminate any net worth deficits we may have during 2010, 2011 and 2012. After 2012, Treasurys remaining funding commitment under the Purchase Agreement will be $149.3 billion ($200 billion maximum amount of the commitment from Treasury reduced by cumulative draws of $50.7 billion for net worth deficits through December 31, 2009), minus the lesser of (a) any positive net worth we may have as of December 31, 2012 and (b) any cumulative amount of any draws that we have taken to eliminate net worth deficits during 2010, 2011 and 2012.

Read the The complete Report

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