Freddie Mac, the No. 2 U.S. mortgage finance company, reported a $550 million net loss for the third quarter which it blamed on a decline in long-term interest rates.
The loss was a contrast to the $880 million gain the company reported for the third quarter of 2005. Freddie said that its business was very sensitive to interest rate fluctuations and that the third-quarter loss came after gains in the first half of the year.
For the first nine months of 2006, Freddie estimated net income of $2.5 billion compared to $1.4 billion for the first nine months of 2005.
The company had previously said that third-quarter returns would be weighted down by a decline in long-term interest rates that has followed the Federal Reserve Board's decision to keep interest rates on hold since an increase in June.
Benchmark 10-year Treasuries yields fell to 4.63% at the end of third quarter from 5.14% at the end of the second quarter.
Higher interest rates reduce the chances that homeowners will prepay their mortgages and so preserve the value of Freddie's assets.
In a statement, Freddie said that it expected to see more losses for the last three months of 2006 that will further offset gains from the first half of the year.
While some recent reports have shown an increase in mortgage delinquencies and a weak housing market, Syron said that Freddie Mac is bullish on the long-term health of the housing sector.
"I think the housing situation is improving," Syron said. "We're pretty comfortable with the long-term view."
Working Toward Timely Filings
The company, which has not provided timely financial statements since a 2003 accounting scandal, said it expected to return to regular filings by the middle of the year.
"We will return to timely, quarterly reporting by the second half (of 2007)," Buddy Piszel, Freddie's chief financial officer, said in a conference call with investors.
The company said that it plans to release 2006 financial results before the end of March.
Freddie is holding $3.1 billion of excess capital under instructions from its main regulator, the Office of Federal Housing Enterprise Oversight. The company would only consider returning that cash to investors after it returns to timely filings and talks with OFHEO, Richard Syron, the company chairman and chief executive, said in the conference call.
In a statement, the company said that its credit guarantee portfolio grew to about $1.5 trillion as of Nov. 30 for an annualized growth rate of about 11%.
Freddie's retained portfolio of mortgages has decreased slightly year to date through November to $704 billion.
That retained portfolio has come under tough scrutiny from some lawmakers, the U.S. Treasury Department and Federal Reserve Board who say Freddie Mac and its cousin, Fannie Mae, are not fit to manage such investments.
The two government-sponsored enterprises hold federal charters to promote home ownership and critics say their combined $1.4 trillion investment portfolio is a systemic risk to the broader economy and should be slashed.
At the end of the last Congressional term, the Treasury and Barney Frank, the new Democratic Chairman of the House Financial Services Committee, found common language that would give a new regulator broad power to control the companies' investments.
Republican lawmakers who favor a tough stand against Fannie and Freddie were not involved in those talks and it is not clear if they would support such a compromise.
In the conference call, Syron said he saw signs that a new Congress could craft reform legislation.
"There does appear to be some movement toward compromise between the (U.S. House of Representatives) side ... and the administration," he said.
The company also reported that it has completed a $2 billion stock buyback begun this summer.