- The Washington Times - Thursday, March 31, 2005


Freddie Mac, the government-sponsored finance firm recovering from a massive accounting scandal, said yesterday that its earnings plunged more than 40 percent last year, hurt by a substantial loss on derivative contracts.

Annual earnings fell to $2.62 billion, or $3.78 a share, after payment of preferred dividends from $4.6 billion, or $6.68 a share, in 2003.

The company blamed its shrinking profit on a $4.48 billion loss from derivatives, financial contracts used to protect its mortgage assets against fluctuating interest rates, but Freddie Mac said derivatives continue to be an effective tool for managing risk.

Freddie Mac, which buys mortgages from lenders and resells them as securities to investors, said net interest income dropped 4 percent to $9.14 billion from $9.5 billion in 2003.

A non-interest loss of $3.04 billion widened from $244 million a year earlier, impacted primarily by its derivative loss, which compares with gains of $39 million in 2003 and $5.3 billion in 2002. Excluding management and guarantee income, the non-interest loss widened to $4.4 billion from $1.9 billion, the company said.

Freddie Mac said the fair value of net assets attributable to shareholders, net of tax, climbed 17 percent to $26.7 billion.

The company added that it ended 2004 with an estimated $3.5 billion of capital in excess of the target surplus level set by its regulator. The Office of Federal Housing Enterprise Oversight (OFHEO) said yesterday that Freddie Mac’s core capital of about $34.9 billion topped the minimum requirement by $10.77 billion.

Administrative expenses expanded to $1.55 billion from $1.18 billion as the company spent more on repairing its bookkeeping following a 2003 scandal that revealed nearly $5 billion in understated profits from 2000 to 2002. Freddie Mac, which has delayed nearly all of its earnings reports since late 2002, said it hopes to return to timely reporting by the end of this year.

Freddie Mac and Fannie Mae, its sister lending company which is also entangled in major accounting troubles, are facing the possibility of tougher oversight as lawmakers discuss legislation that would give OFHEO more control over the two.

While the company said it supports legislative reform, it warned that such measures could adversely affect its financial condition and operating results in the coming years, as well as the ability to meet its mission of increasing homeownership. Freddie Mac said it financed homes for more than 3.7 million families in 2004.

“We very much want Congress to pass the sound bill this year,” Freddie Mac Chairman and Chief Executive Richard F. Syron said on a conference call. “We wanted it to be a sound bill that is consistent with our objectives and needs of our shareholders, and we are working hard to facilitate that outcome.”

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