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Freddie Mac Reports Operating Results (10-Q)

May 05, 2010 | About:

Freddie Mac (FRE) filed Quarterly Report for the period ended 2010-03-31.

Freddie Mac has a market cap of $946.7 million; its shares were traded at around $1.46 with and P/S ratio of 0.1. Freddie Mac had an annual average earning growth of 0.5% over the past 10 years.FRE is in the portfolios of Murray Stahl of Horizon Asset Management, Bruce Kovner of Caxton Associates, Richard Pzena of Pzena Investment Management LLC.

Highlight of Business Operations:

Our financial results for the first quarter of 2010 and net worth as of March 31, 2010 were significantly adversely affected by changes in accounting principles, which resulted in a net decrease to total equity (deficit) as of January 1, 2010 of $11.7 billion. See Changes in Accounting Standards Related to Accounting for Transfers of Financial Assets and Consolidation of VIEs for additional information. We had a net loss attributable to Freddie Mac of $6.7 billion for the three months ended March 31, 2010. Total equity (deficit) was $(10.5) billion at March 31, 2010. The $10.5 billion deficit was primarily driven by: (a) a net decrease in total equity (deficit) of $11.7 billion due to the cumulative effect of the change in accounting principles; (b) our first quarter 2010 net loss of $6.7 billion reflecting the ongoing adverse conditions in the U.S. mortgage markets; and (c) the dividend payment of $1.3 billion to Treasury on the senior preferred stock, partially offset by a $4.8 billion decrease in unrealized losses recorded in AOCI primarily driven by improved values on the companys available-for-sale securities. To address the deficit in our net worth, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury for $10.6 billion in funding under our Purchase Agreement with Treasury. Following receipt of the draw, we will have received an aggregate of $61.3 billion from Treasury under the Purchase Agreement.

Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. To date, we have received an aggregate of $50.7 billion in funding under the Purchase Agreement. To address our deficit in net worth of $10.5 billion as of March 31, 2010, FHFA, as Conservator, will submit a draw request, on our behalf, to Treasury under the Purchase Agreement in the amount of $10.6 billion. We expect to receive these funds by June 30, 2010. Upon funding of the draw request: (a) the aggregate liquidation preference on the senior preferred stock owned by Treasury will increase from $51.7 billion to $62.3 billion; and (b) the corresponding annual cash dividends payable to Treasury will increase to $6.2 billion, which exceeds our annual historical earnings in most periods. We expect to make additional draws under the Purchase Agreement in future periods due to a variety of factors that could adversely affect our net worth.

In November 2008, the Federal Reserve established programs to purchase: (a) our direct obligations and those of Fannie Mae and the FHLBs; and (b) mortgage-related securities issued by us, Fannie Mae and Ginnie Mae. According to information provided by the Federal Reserve, it held $66.4 billion of our direct obligations and had net purchases of $432.3 billion of our mortgage-related securities under these programs as of April 21, 2010. The Federal Reserve completed its purchases under these programs in March 2010. We have not experienced any immediate adverse effects on our business from the completion of these programs. However, it is difficult at this time to predict the impact that the completion of these programs will have on our business and mortgage market generally over time. For more information, see LIQUIDITY AND CAPITAL RESOURCES Liquidity and RISK FACTORS in our 2009 Annual Report.

Net loss attributable to Freddie Mac was $6.7 billion and $10.0 billion for the first quarters of 2010 and 2009, respectively. Key highlights of our financial results for the first quarter of 2010 include:

The unpaid principal balance of our mortgage-related investments portfolio, for purposes of the limit imposed by the Purchase Agreement and FHFA regulation, was $753.3 billion at March 31, 2010, compared to $755.3 billion at December 31, 2009. The unpaid principal balance of our mortgage-related investments portfolio remained relatively flat primarily due to liquidations, offset by the purchase of $56.6 billion of delinquent loans from PC trusts, which resulted from our February 10, 2010 announcement that we would purchase substantially all of the single-family mortgage loans that are 120 days or more delinquent from our related fixed-rate and adjustable-rate PCs.

The unpaid principal balance of our single-family credit guarantee portfolio decreased 1%, from $1.90 trillion at December 31, 2009 to $1.88 trillion at March 31, 2010. The unpaid principal balance of our multifamily mortgage portfolio decreased 1%, from $98.2 billion at December 31, 2009 to $97.2 billion at March 31, 2010. Our total non-performing assets were approximately 5.8% and 5.2% of our total mortgage portfolio, excluding non-Freddie Mac securities, at March 31, 2010 and December 31, 2009, respectively, and our loan loss reserves totaled 33.3% and 34.1% of our non-performing loans, respectively, as of such dates.

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