Housing Bubble
Freddie Mac announces record earnings for 2002
Freddie Mac today announced preliminary, unaudited full-year and fourth quarter 2002 earnings. Final audited results will be released upon completion of the audit for 2002 and re-audit of 2001 and possibly 2000.
As previously announced by Freddie Mac, the following financial results are unaudited or subject to re-audit and will change when the corporation's new auditor, PricewaterhouseCoopers ("PwC"), finishes its first full-year audit and re-audit of Freddie Mac's financial statements.
Based on the information currently available, Freddie Mac expects to restate its financial results for 2002, 2001 and possibly 2000. Freddie Mac currently believes that the likely cumulative effect of the restatement will be to materially increase the reported levels of GAAP earnings and "Operating Earnings," Freddie Mac's non-GAAP financial measure, and that there may be more volatility in reported quarterly earnings for those periods. Freddie Mac also believes that the effect of these adjustments will be limited to changes in the timing of the recognition of income and associated balance sheet effects. As a result, cumulative increases in prior periods will have offsetting effects in future periods. Expected adjustments will have no adverse impact on the economics of the corporation, as represented by Freddie Mac's current fair market value and market risk disclosures. Freddie Mac further believes that the adjustments will increase the corporation's cumulative capital surplus under regulatory capital requirements.
Freddie Mac recognises that it is important for investors to have a clear understanding of the earnings effects associated with the anticipated adjustments. However, these effects cannot be quantified with sufficient precision until a detailed review is completed, including the impact of the adjustments on certain hedge accounting relationships. Freddie Mac will provide additional disclosure to the market when management is reasonably certain about the adjustments to be reflected in the audited financial statements.
"Freddie Mac is a strong company that is fully dedicated to meeting our obligations to the public and to investors. We have identified past issues. We are confronting them, and we are working to get audited financial statements in the hands of investors as quickly as possible," said Leland C. Brendsel, Chairman and Chief Executive Officer.
PwC was appointed as Freddie Mac's auditor in March 2002, replacing Arthur Andersen. It will take some time for PwC to finish its audit and re-audit because of the corporation's re-evaluation, in conjunction with PwC, of certain of Freddie Mac's accounting policies and practices. As previously communicated by the corporation, Freddie Mac and PwC have concluded that in some instances the application of certain accounting policies, as used by Freddie Mac and concurred with by Arthur Andersen, were not consistent with generally accepted accounting principles ("GAAP"). These include the application of SFAS 133 (accounting for derivative instruments) and SFAS 115 (classification of mortgage assets between available-for-sale and trading accounts through certain resecuritisation transactions). Freddie Mac and PwC are in agreement about these matters and are working closely together as PwC completes the audit and re-audit.
"Freddie Mac produced strong financial results in 2002, financing homes for a record 4.5 million families while adhering to our strict risk management discipline," Brendsel said. "We expect continued strong performance in 2003."
Brendsel added, "Freddie Mac is committed to the highest standards of financial integrity. We fully support the re-audit, and we are confident it will have no adverse impact on the company's fundamental strength. Last week, all three major rating agencies affirmed our high ratings."
"Strong portfolio growth and continued credit strength drove our performance during the year," remarked David W. Glenn, Vice Chairman and President. "We produced high-quality, double-digit portfolio growth in both lines of business and successfully managed interest-rate risk in a challenging environment. Our credit losses for the year represented less than 1 basis point of our total mortgage portfolio."
Freddie Mac's total mortgage portfolio grew by US$173 billion during 2002, representing growth of 15 percent. This strong growth reflects record new business purchases. Growth from mortgage purchases was partially offset by sharply higher liquidations, which were driven by the surge in refinance activity in the low interest-rate environment.
Freddie Mac's 2002 credit losses represented 0.7 basis points of its average total mortgage portfolio in 2002, unchanged from 2001. Due to the corporation's strong credit position and the sustained strength of the housing market, credit losses remained low in 2002 despite higher real estate owned ("REO") activity.
Freddie Mac's safety and soundness regulator, OFHEO, announced that the corporation's total capital required under the risk-based capital standard at September 30, 2002, was US$4.9 billion, yielding a risk-based capital surplus of US$18.2 billion. This result reflects Freddie Mac's low risk profile and the conservative manner in which it operates. Freddie Mac's minimum capital surplus was US$2.1 billion at September 30, 2002.
During December 2002, OFHEO announced that Freddie Mac's total capital exceeded the risk-based capital standard by US$18.2 billion as of September 30, 2002. Freddie Mac's surplus against the risk-based capital standard reflects its low level of interest- rate and credit risk.
Due to the the pending re-audit and restatement , Freddie Mac is not providing specific earnings and net interest margin guidance for 2003 at this time.
In 2003, Freddie Mac expects to achieve strong financial performance and maintain low levels of credit and interest-rate risk. This performance is expected to be driven by a growing mortgage market and the corporation's securitisation and retained portfolio activities.
In 2003, Freddie Mac expects the growth rate of Total PCs to exceed the expected 7 to 9 percent growth in U.S. residential mortgage debt outstanding. The corporation also anticipates that its average guarantee fee rate will trend up in 2003 as the effects of previously announced fee increases are realised. In addition, given the corporation's strong credit position, Freddie Mac expects credit losses to remain low but to increase modestly in 2003. Freddie Mac continues to anticipate retained portfolio growth of 8 to 12 percent in 2003. The corporation expects that the growth rate of its administrative expenses will be modestly higher in 2003 than the 9 percent growth in 2002.
