The FINANCIAL -- Mortgage-finance company Freddie Mac said it swung to a loss in its third quarter and won't send the U.S. Treasury a payment in December.
The McLean, Va., company posted a loss of $475 million, compared with a profit of $2.08 billion in the prior-year period. The latest results were driven by losses on the derivatives that Freddie uses to hedge its interest-rate risk, as well as changes in the value of some mortgage loans and mortgage-related securities.
The company's derivatives gains and losses reflect an accounting mismatch between how the derivatives and the assets the derivatives hedge are valued, and the company has said it expects the net effect to be neutral over time.
Derivative losses were $4.17 billion in the quarter, up from $617 million a year earlier, amid declines in long-term interest rates, according to Freddie Mac.
Freddie and mortgage-finance firm Fannie Mae were put into a so-called conservatorship under government control during the 2008 financial crisis, eventually receiving nearly $188 billion in support from the U.S. Treasury. However, for the last few years, the companies have been immensely profitable, sending the government more than they took.
Freddie received $71.3 billion in bailout support from taxpayers, but the company has so far sent $96.5 billion to the Treasury.
Because Freddie's net worth at the end of the quarter was below the $1.8 billion capital reserve amount, it won't be required to send a payment to the Treasury in December.
Under the current terms of its bailout, the companies must send nearly all of their profits to the government in the form of dividends and wind down their capital buffers over time. Some private shareholders of Fannie and Freddie are challenging that arrangement in court.
Meanwhile, while under government control, Fannie and Freddie have seen halting efforts by lawmakers to replace them with a new housing-finance system or to change certain aspects of their operations.
With rising home prices, the company saw its serious delinquency rate improve to 1.41%, down from 1.96% in the prior- year period and its lowest level since October 2008.
Fannie and Feddie don't make loans. Instead they buy them from lenders, wrap them into securities and provide guarantees to make investors whole if the loans default.