Back in 2009, with the financial world in tatters, the now CEO of Freddie Mac, Donald Layton, was busy overseeing a recapitalization of E*TRADE's balance sheet.
He led the restructuring effort at the online brokerage business to get it back on track. Not an easy task.
So, he’s seen some of the worst and the best in the world of economics.
And right now, unlike in 2009, the mortgage finance world is at its best, he says, and can only get better.
“The mortgage industry is a far better run industry,” he said in a call with HousingWire this morning. “We understand risk better.”
“We just can't brag about it that much,” he added in reference to the conservatorship status of the government-sponsored enterprise.
It’s that conservatorship status that has Freddie Mac hogtied by two angles: limits are placed on the way in which earnings are calculated and the public is more interested in politically sensitive topics.
Layton can comment on the former, but not the latter, previously referring to losses as accounting noise.
Freddie Mac reported a $354 million net loss in the first quarter, significantly down from its $2.2 billion net income recorded in the fourth quarter of 2015. The news is a reminder of the government-sponsored enterprise’s net loss of $475 million for the third quarter of 2015, which marked its first loss in four years.
Freddie also posted a comprehensive loss of $200 million, down from last quarter’s comprehensive income of $1.6 billion, but similar to the comprehensive loss of $501 million for the third quarter of 2015.
Due to Freddie’s net worth of $1 billion, it required no draw from U.S. Treasury. To date, the company has returned $98.2 billion to taxpayers. That’s $27 billion more than it received.
Layton noted that today's loss is only one-sixth of what's necessary to declare before it could even request additional federal funding.
The company also performed well in the yearly stress tests offered by the Federal Reserve and tweaked by its regulator, the Federal Housing Finance Agency.
This year, Freddie Mac “survived” the severely adverse economic scenario that imagines a crash larger that the subprime crisis.
Layton noted that during the scenarios, Freddie Mac can’t adjust its position, which makes the process indelicate. Still, it’s important, he added.
“Like all such things, there’s a crudeness, but it's valuable if not exact,” he said.
So, should we expect more losses from Freddie, despite the strength of the overall business?
Yes, as indicated by Jim Vogel, strategist, FTN Financial Group.
“Freddie faces longer term profitability challenges, but as first-quarter results demonstrated, its management is taking as many steps as possible to keep overall financials reasonably anchored when the total mortgage market isn't growing and stubborn credit issues from 10 years ago still linger,” Vogel wrote in an email to clients this morning.
Read: Another analyst calls Freddie insolvent.
“Interest rates fell more in Q1 this year than in Q3 last year, yet Freddie Mac was able to keep the damage at a comparable level,” Vogel added.
Still there are vocal critics of Freddie Mac.
“On behalf of our small- and independent mortgage lender members, the CMLA urges FHFA Director Mel Watt to immediately address the risk posed by inadequate capital for Fannie Mae and Freddie Mac,” said Glen Corso, executive director of Community Mortgage Lenders of America. “Running a major portion of the U.S. housing finance system on a diminishing level of capital, and relying upon a line of credit to the U.S. Treasury as a substitute for capital, is not a sensible solution.”
And with revenues not growing appreciably at Freddie Mac, critics such as Corso will always remain vocal, regardless of how well the mortgage industry is being run.
