Federal Home Loan Mortgage Corp (OTCBB:FMCC) recent conclusion of sale of risk sharing bonds will help the mortgage entity to mitigate the earnings volatility. The financial numbers in last quarter fueled the concerns that the mortgage company may again need the assistance of taxpayer funds. The reason is the initial format of the “Notes” through which Federal Home is transferring risk to investors on more than ten percent of its $1.6 trillion in ‘mortgage guarantees.’
The expert view
Mike Reynolds of Federal Home Loan stated that the original treatment can lead to income-statement volatility. The sale of new bonds won’t be classified as derivatives helping to minimize the volatility. It can be termed as a stable and sustainable measure to be in a better position to extend the numbers in a large way.
The financials
Federal Home as well as Fannie Mae both mortgage companies were taken over by the government in year 2008. However, they still follow the procedures like normal firms in reporting earnings. Their financial performance works as a base to decide their contribution to the treasury. Federal Home Loan posted derivatives losses amounting to $3.4 billion in 4Q largely due to a drop in interest rates. The prime issue was the accounting rules due to which interest rates impact was not balanced by the changes made in the assets values being hedged.
The view
After the quarter in which Federal Home profits plunged to $227 million from $8.6 billion, a regulator said that Fannie Mae and Federal Home’s ability to posting profits shouldn’t be presumed. There is also an ongoing debate on whether the two firms should be allowed to retain earnings or not.
In last trading session, the stock price of Federal Home declined 0.76% to close the trading session at $2.6. The decline came at a share volume of 1.01 million compared to average volume of 2.39 million.
