Freddie Mac reported a $5 billion profit during the second quarter, the second-largest quarterly profit in the company's history and the latest reminder of how surging profits at Freddie and its larger sibling, Fannie Mae, could reshape the debate over the firms' futures.
The second-quarter earnings compare with a year-earlier gain of $3 billion and marked the seventh straight profit for the mortgage-finance company. Rising home prices, falling mortgage delinquencies, and higher loan fees have marked a sharp turnaround from a four-year period in which the company suffered heavy losses that forced it to seek massive infusions from the U.S. Treasury.
"Clearly our outstanding financial results continue to benefit from the turnaround in the housing markets as well as from our work to minimize losses and build a strong new book of business," said Donald Layton, Freddie's chief executive.
Freddie said it will make a $4.4 billion dividend payment to the U.S. Treasury.
While the company isn't allowed to pay off the $71 billion in bailout money it received beginning five years ago, the latest payment will bring to $41 billion the amount of dividends it will have returned to the Treasury, leaving its net cost to taxpayers at around $30 billion.
At the current pace, Freddie stands to pay back more in dividends than it has drawn by early 2015. The company also has yet to claim certain tax benefits worth as much as $29 billion that could lead to a large one-time payment to the Treasury. Mr. Layton said that if recent positive trends continued, the company could reverse the write-downs of those tax assets over the next two quarters.
Freddie has returned to profitability in large part because it has sharply tightened its lending standards, meaning that riskier loans from the housing bubble are being replaced with much safer mortgages. But the company is required by its regulator to shrink its huge mortgage portfolio, which typically accounts for an outsize share of its net income. The upshot is that Freddie's and Fannie's biggest profit engine will shrink over the next few years, which could one day curb recent record profits.
The fact that Fannie and Freddie are throwing off large profits, nearly all of which are being swept away by the Treasury, could reshape the debate over how and when to restructure the firms, which were taken over by the government in 2008 through a legal process known as conservatorship.
On Tuesday, President Barack Obama called for replacing Fannie Mae and Freddie Mac with a new system of guaranteeing certain mortgages in order to preserve widespread access to long-term, fixed-rate mortgages. Those loans remain unique in the U.S. and the White House said it would support some kind of permanent but limited federal backstop to keep them widely available to middle-class consumers.
The cost of the government's bailouts of Fannie and Freddie have fallen amid the housing market's revival and following changes made at the beginning of the year to force the companies to send almost all of their profits to the Treasury as dividend payments.
The bailout tab for both companies has declined to about $51 billion from a high of $151 billion at the end of 2011.