Accounting Changes Hide Freddie's Flaws

The first-quarter loss also marked a big improvement from the $2.5 billion loss recorded by Freddie in the fourth quarter. In that period, Freddie's loss included $1.3 billion in losses on credit guarantees, but no such losses were included in the first-quarter results. Also, losses related to trading securities and derivatives fell to $58 million in the first quarter compared with $2.1 billion in the fourth, reflecting an accounting change, and expenses on credit guarantees fell to $258 million from $2.1 billion.

Freddie said the improvement in its first-quarter results compared with its fourth-quarter results reflect "reduced losses related to a change in the guarantee obligation valuation methodology" it uses on its books. It also reflected "lower interest-rate related mark-to-market losses." Both items stemmed from accounting changes the company adopted at the beginning of 2008, when the housing and credit crisis was in full swing.

While those changes in the company's bookkeeping helped its bottom-line, the huge decline in the "fair value" of its net assets showed that the struggle for Freddie's portfolio worsened in the first quarter. Moreover, the company's credit costs quintupled during the quarter compared with last year to $1.45 billion, up 59% from the fourth quarter as delinquencies and foreclosures continued to rise and home prices continued to fall.

"While our expectation is for continued weakness in the housing and economic environment to negatively impact our overall performance through the remainder of this year, we have put Freddie Mac on a better foundation to manage through the current cycle and emerge a successful, long-term competitor," said the company in a press release.

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