Magazine article American Banker

Freddie May Face Happy Problem: Too Much Profit

Magazine article American Banker

Freddie May Face Happy Problem: Too Much Profit

Article excerpt

Mr. O'Donnell is an equity analyst with Smith Barney & Co. In the following article, adapted from a note distributed to clients, he reviews the Federal Home Loan Mortgage Corp.'s recent investor conference in New York.

Freddie Mac focused on two themes at the conference: credit quality and retained portfolio growth.

As credit concerns have been foremost on the minds of investors of late, we believe that Freddie Mac was quite smart in addressing the concerns directly.

And it was clearly a good move for the government-sponsored enterprise to accentuate the positive: surging portfolio growth, which is its engine of earnings growth.

Management underscored a position similar to ours, discussed in previous notes, that the divergence of credit costs between Freddie Mac and Fannie Mae results from the current peaking in chargeoffs on the pre-1992 (largely California) book of business.

While the particular book of business accounts for just over 20% of the current total, it is now contributing approximately 80% of the credit losses. However, going forward this book should become less of a burden as both balances and loss rates trail off, and as portfolio growth diminishes in relative importance.

Credit problems related to the pre-1992 situation should also be reduced by the successful implementation of the loss mitigation program, which the company began to emphasize in 1993. Loss mitigation involves both the restructuring of loans and the preselling of properties, which are heading into the foreclosure process. …

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