Freddie Mac Reports Record $11 Billion Profit

Freddie Mac headquarters in McLean, Virginia Courtesy Freddie Mac

How quickly things change. In 2011, housing giant Freddie Mac lost $5.3 billion. Yesterday it announced net income of $11 billion for 2012—its first profit since 2006 and its largest ever. Consider that number yet another piece of evidence that the housing market is marching toward recovery.

Freddie had slightly less revenue than in 2011, but its costs are way down—fewer borrowers are behind on their loans, so Freddie was able to reduce how much money it set aside for potential losses. Also, the derivatives bets and investments Freddie made performed very well. (The data are available in this PDF.)

Although Freddie’s profits have surged, it’s not out of the woods yet. First, there’s the little matter of its bailout. Freddie has paid back only about a third of the $71.3 billion it got from the federal government. (It had been receiving new bailouts nearly every quarter until this summer.) The fact that the government still essentially owns Freddie has also put the agency in a difficult position—at once needing to stem losses and stop the bailouts, but also having a public mission to help homeowners. Those two mandates have at times clashed, as news organizations such as ProPublica have documented, with Freddie opting for policies and investments that may have helped its bottom line over aiding borrowers.

Also, Freddie’s role in the housing bubble still raises calls for reforms. Before the credit crisis, Freddie Mac was a private entity with an implicit government guarantee—a quasi-governmental agency that guaranteed mortgages and bundled them together to sell to investors. Freddie’s business largely dealt in safer prime mortgages, with tighter lending standards. But starting around 2002 it began to lose market share to subprime lenders. Freddie did dip it’s toe into subprime, actually buying some securities that bundled together the risky mortgages, but in general it needed the bailout because the subprime bubble took down wide swaths of the housing market.

Washington has been looking for ways to reduce the risk that the government could be on the hook if Freddie runs into trouble again. For example, a bipartisan group of 21 former senators and government officials propose having investors absorb some losses before Freddie’s guarantee kicks in. But specific reforms to unwind Freddie and its sister, Fannie Mae, have not gained real traction. And for better or worse, Freddie’s improved performance certainly doesn’t increase the urgency to arrive at a solution.

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