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Freddie Mac Reports Big Second Quarter Profit, Will Pay Treasury $7 Billion Dividend

Stocks in this article: FMCC FNMA

NEW YORK ( TheStreet) -- Freddie Mac (FMCC) on Wednesday posted a $4.6 billion profit for the first quarter of 2013, its second largest ever, on the back of a recovering housing market, improving delinquency rates and strong refinancing activity.

Mortgage loan delinquency rates continued to decline and remained well below the industry average, the company said. Single-family serious delinquency rates came in at 3.03%, while multifamily default rates were 0.16%.

The bailed-out housing giant said it will pay the Treasury $7 billion in dividends in the second quarter. In the first quarter, it paid the government $5.8 billion.

Freddie Mac and Fannie Mae (FNMA) were taken under government conservatorship in September 2008. Under revised terms of the bailout agreement, both mortgage giants are required to turn net worth in excess of $3 billion every quarter to the government in the form of a dividend.

Previously, the agencies were required to pay the Treasury a 10% dividend. This turned out to be a self-defeating arrangement, as the housing giants wound up drawing additional funds from the Treasury, just to meet their dividend obligations.

But with the housing giants reporting record profits, the new arrangement is a windfall for the government.

In total, Freddie Mac has paid $29.6 billion in dividends to the Treasury since it was taken into conservatorship in 2008. The dividends do not count as repayment of bailout money. The Treasury still holds $72.3 billion in senior preferred stock in the company.

Fannie Mae has yet to report its first quarter results. It earned $17.2 billion for 2012 and $7.6 billion for the fourth quarter of 2012, the largest quarterly and annual profits in the company's history. Fannie Mae has paid $35.6 billion in dividends, and the Treasury has $117.1 billion in senior preferred stock.

The future of Fannie Mae and Freddie Mac remains unresolved. Hedge funds are lobbying Washington to return the companies back to private hands and are betting on the junior preferred shares of the companies, which have had their dividends suspended since September 2008. Political observers, however, say this is total fantasy and ignores political reality.

The Federal Housing Finance Agency is taking steps to reduce the size of the agencies' share of the mortgage market. These include raising the guarantee fees charged by the mortgage giants, limiting their purchase of loans to only "qualified mortgages" and embarking on a strategy to eventually share credit risk with private players.

-- Written by Shanthi Bharatwaj in New York.

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Disclosure: TheStreet's editorial policy prohibits staff editors and reporters from holding positions in any individual stocks.

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