Freddie Macundefined said its first-half earnings benefited substantially from rising interest rates, but the mortgage lender expects some of those gains to be reversed during the third quarter.
The McLean, Va., government-sponsored enterprise said it estimates it made $1.2 bilion in the second quarter and $2.7 billion in the first half ended June 30.
"Management expects to report the company's net income for the first half to have benefited significantly from mark-to-market gains recorded for its guarantee asset and derivatives, as interest rates increased during the first half of the year," Freddie said. "Management continues to expect the company's net income to remain volatile from period to period in response to movements in interest rates. Given the reversal of interest rates of around 50 basis points since June 30, management expects to report a significant reversal of these mark-to-market gains in the company's third quarter results."
Through August 2006, the company's credit guarantee portfolio grew to $1.4 trillion, an annualized growth rate of 11%. Management estimates that the company's share of government-sponsored enterprise mortgage securitizations was 43% through August, compared to about 45% through August 2005 and about 41% in 2004.
Through August 2006, the company's $707 billion retained portfolio decreased at an annualized rate of 1% as there was an absence of financially attractive buying opportunities during the first half of the year, Freddie said.
The news comes as the company, laid low in recent years by an accounting scandal that resulted in management changes, struggles to fix its books.
"Demonstration of success in our mission and our business is dependent on improving our internal controls and systems and returning to timely financial reporting," said Eugene M. McQuade, Freddie Mac president and chief operating officer. "To meet these goals, we developed and are now executing a comprehensive plan for remediating our controls and systems. Our approach includes fixing control issues; strengthening our financial close process; implementing critical systems initiatives; and reviewing our business process transaction controls from beginning-to-end. The result will be a stronger Freddie Mac."