Federal Home Loan Mortgage Corp (OTCBB:FMCC) recent sale of risk sharing bonds was planned in a structured way that will help the mortgage bank to minimize the earnings volatility. The performance in last quarter fueled the concerns that the company may again need the help of taxpayer funds. It is due to the fact that the initial format of the notes through which Freddie is transferring risk to investors on over 10% of its $1.6 trillion in ‘mortgage guarantees.’ This has to be accounted for as derivatives and will be subject to normal valuations that affect profits.
The details
Mike Reynolds of Federal Home said that the original treatment can result in income-statement volatility. The new bonds won’t be treated as derivatives and therefore they will not witness significant volatility. It appears as a more stable and sustainable way to be able to increase the numbers in a large way.
The performance
Federal Home and Fannie Mae were seized by the government in 2008. However, they still operate like normal firms in posting earnings. The financial performance is used to decide how much they will take from or pay to the treasury. Federal Home recorded $3.4 billion in derivatives losses in 4Q largely due to a decline in interest rates. The major problem was the accounting rules due to which impact of interest rates were not offset by alterations in the assets values being hedged.
The arguments
After the quarter in which Freddie profits declined to $227 million from $8.6 billion, a regulator for its overseer stated that Fannie Mae and Federal Home’s ability to keep recording profits shouldn’t be presumed. The shareholders argue that the mortgage firms should be permitted to retain earnings.
In last trading session, the stock price of Federal Home opened at $2.61 and consolidated to close flat at $2.62 on share volume of 776,613.
