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Freddie Swings to Red on Hedging Losses

Hedging its interest-rate risk proved costly to the Federal Home Loan Mortgage Corp., though existing reserves will let it avoid another Treasury draw.

Freddie Mac disclosed in its third-quarter 2015 earnings
report that it has helped 1,715,000 families own or rent a home so far this year.

That puts the McLean, Virginia-based company ahead of all of last year, with the number of families helped for the full-year 2014
at 1,627,000.

During just the third quarter, around 432,000 single-family loans were funded, while another 167,000 multifamily rental units were financed.

Since 2009, Freddie reports 14,671,000 families have benefited from its services.

New single-family funding volume at the secondary mortgage lender was $94 billion in the the third quarter.

Activity eased from the previous three-month period, when single-family funding volume was $101 billion.

But business escalated versus the third-quarter 2014, when single-family volume was just $77 billion.

For all three quarters so far this year, single-family new funding volume amounted to
$275 billion.

Third-quarter 2015 business included $47 billion in purchase financing and $46 billion in refinancing.

Multifamily new business volume totaled $34 billion during the first nine months of this year.

During the third-quarter 2015, the sale of $0.640 billion in non-performing, unsecuritized single-family loans was completed. In addition, another $1.4 billion in loan sales are expected to close in the fourth quarter.

Freddie swung to an $0.669 billion pre-tax third-quarter loss from a $6.078 billion
second-quarter profit and a $3.037 billion profit a year earlier.

explained that it had around $1.5 billion in after-tax fair-value losses on derivatives that are used to hedge interest-rate risk.

“Significant GAAP earnings volatility can occur as the derivative instruments are measured at fair value each period while certain hedged assets and liabilities are not,” the report said.

Making the quarter-over-quarter comparison more dramatic was that the prior period benefited from $1.5 billion using the very same accounting.

It was the first quarterly loss in four years, Freddie Mac Chief Executive Officer Donald H. Layton said in the report.

“Otherwise, the business had very strong fundamentals with growing volumes of guarantees and continued improving credit quality in the guarantee businesses,” Layton said.

Freddie has taken $71.3 billion in draws from the Department of the Treasury, while it has paid the Treasury $96.5 billion in dividends.

“Finally, as this loss was just a fraction of the $1.8 billion net worth reserve we have under the preferred stock purchase agreement, no U.S. Treasury draw was needed, so total dividends paid remains unchanged at $96.5 billion, $25 billion more than we have received,” Layton explained.

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