Stock Alert for Federal Home Loan Mortgage Corp. (FMCC)

Federal Home Loan Mortgage Corp. (OTCBB: FMCC)

Federal Home Loan Mortgage Corp. (FMCC), formerly Freddie Mac, is engaged in purchasing residential mortgages and mortgage-related securities in the secondary mortgage market and securitizing them into mortgage-related securities that can be sold to investors. The Company purchases single-family and multifamily mortgage-related securities for its mortgage-related investments portfolio. It also purchases multifamily residential mortgages in the secondary mortgage market and hold those loans either for investment or sale. FMCC finances purchases of its mortgage-related securities and mortgage loans, and manages its interest-rate and other market risks, by issuing a range of debt instruments and entering into derivative contracts in the capital markets. The Company operates in three segments: Investments, Single-family Guarantee and Multifamily.

Federal Home Loan Mortgage Corp. was founded in 1970 and is based in McLean, Virginia.

Share Statistics (Jul-15-10)			FY 2007	FY 2008	% Chg	Q4 2008	Q4 2009	% Chg
Symbol	FMCC	Revenue, $Mn	43.1B	12.3B	71.5%	-7.90B	2.72B	134.4%
Current price	$0.34	Gross marg.	3.0%	14.2%	373.3%	n/a	n/a	n/a
52wk Range:	$2.50-0.23	Oper. margin	-14.0%	-362.3%	2487%	n/a	n/a	n/a
Avg Vol (3m):	19,650,400	Net margin	-7.3%	-407.4%	5480%	n/a	n/a	n/a
Market Cap.	221.99M
Shares Outst.	649.1M	EPS, $	-5.37	-34.60	544.3%	-7.37	-2.39	67.6%

Source: Reuters.com, SEC Filings.

Financial Summary

FMCC reported a net loss of $21.6 billion for the full-year 2009, compared to a net loss of $50.1 billion for the full-year 2008. After dividend payments of $4.1 billion during the year on its senior preferred stock to Treasury, FMCC reported a net loss attributable to common stockholders of $25.7 billion, or $7.89 per diluted common share, for the full-year 2009, compared to a net loss attributable to common stockholders of $50.8 billion, or $34.60 per diluted common share, for the full-year 2008.

For the quarter ended December 31, 2009, the Company reported a net loss of $6.5 billion, compared to a net loss of $5.4 billion for the quarter ended September 30, 2009. After the dividend payment of $1.3 billion on its senior preferred stock to Treasury, FMCC reported a net loss attributable to common stockholders of $7.8 billion, or $2.39 per diluted common share, in the fourth quarter of 2009, compared to a net loss attributable to common stockholders of $6.7 billion, or $2.06 per diluted common share, in the third quarter of 2009.

Fourth-quarter and full-year 2009 results were negatively impacted by $7.1 billion and $29.8 billion in credit-related expenses, respectively, reflecting the challenging economic conditions during 2009. In addition, fourth-quarter and full-year 2009 results were affected by $3.4 billion and $4.2 billion in LIHTC partnerships expense, respectively, primarily due to the write-down of the carrying value of the Company’s LIHTC partnership investments to zero as of December 31, 2009. These results were partially offset by net interest income of $4.5 billion in the fourth quarter of 2009 and $17.1 billion in the full-year 2009, mainly due to lower funding costs.

FMCC had positive net worth of $4.4 billion at December 31, 2009, compared to positive net worth of $9.4 billion at September 30, 2009. As a result of the positive net worth, no additional funding was required from Treasury under the terms of the Purchase Agreement for the fourth quarter. The decline in positive net worth for the fourth-quarter of 2009 resulted from the fourth-quarter 2009 net loss of $6.5 billion and the dividend payment of $1.3 billion to Treasury on the senior preferred stock, partially offset by a $2.7 billion decrease in unrealized losses recorded in accumulated other comprehensive income (loss) (AOCI) primarily driven by improved values on the Company’s available-for-sale (AFS) securities. FMCC had a net worth deficit of $30.6 billion at December 31, 2008.

Net interest income for the fourth quarter of 2009 was $4.5 billion, relatively unchanged from the third quarter of 2009. Net interest yield on a fully taxable-equivalent basis for the fourth quarter of 2009 was 215 basis points, compared to 205 basis points for the third quarter of 2009. The increase in net interest yield in the fourth quarter was primarily driven by lower funding costs due to lower interest rates on the Company’s short- and long-term debt.

Net interest income for the full-year 2009 was $17.1 billion, compared to $6.8 billion for the full-year 2008. Net interest yield on a fully taxable-equivalent basis for the full-year 2009 was 194 basis points, compared to 87 basis points for the full-year 2008. The increase in net interest income and net interest yield during 2009 was primarily driven by a decrease in funding costs as a result of the replacement of higher cost short- and long-term debt with lower cost debt, as well as an increase in the average balance of the Company’s investments in mortgage loans and mortgage-related securities. These increases were partially offset by the impact of declining short-term interest rates on the Company’s floating-rate investments.

Net interest income and net interest yield during 2009 exclude the cost of funds the Company received from Treasury under the Purchase Agreement, which is reported as dividends paid on senior preferred stock.

Management and guarantee income for the fourth quarter of 2009 was $743 million, compared to $800 million for the third quarter of 2009. Management and guarantee income for the full-year 2009 was $3.0 billion, compared to $3.4 billion for the full-year 2008.

The decreases in management and guarantee income for both the fourth quarter and full-year 2009 reflect reduced amortization income related to certain pre-2003 deferred fees due to an increase in forecasted interest rates, which resulted in a decrease in projected prepayments.

Low-income housing tax credit partnerships for the fourth quarter of 2009 was an expense of $3.4 billion, compared to an expense of $479 million for the third quarter of 2009. Low-income housing tax credit partnerships for the full-year 2009 was an expense of $4.2 billion, compared to an expense of $453 million for the full-year 2008.

The increase in LIHTC partnerships expense in both the fourth quarter and full-year 2009 was mostly driven by the write-down of the carrying value of the Company’s LIHTC partnership investments to zero during the fourth quarter. On February 18, 2010, after consultation with Treasury and consistent with the terms of the Purchase Agreement, the Federal Housing Finance Agency (FHFA) informed Freddie Mac the Company may not sell or transfer the assets and that FHFA sees no other disposition options. As a result, the Company wrote down the carrying value of its LIHTC investments to zero as of December 31, 2009. This write-down increases the likelihood that the Company will require additional draws from Treasury under the Purchase Agreement. For a more detailed discussion, see “Note 5: VARIABLE INTEREST ENTITIES” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Other non-interest income (loss) for the fourth quarter of 2009 was income of $883 million, compared to a loss of $1.4 billion for the third quarter of 2009. Other non-interest income (loss) for the full-year 2009 was a loss of $1.6 billion, compared to a loss of $32.1 billion for the full-year 2008.

Included in other non-interest income for the fourth quarter of 2009 were net mark-to-market gains of $2.1 billion, compared to net mark-to-market gains of $42 million in the third quarter of 2009. Fourth-quarter net mark-to-market gains reflect the effect of higher long-term interest rates and tighter spreads on the Company’s derivative portfolio, guarantee asset and trading securities.

Also included in other non-interest income for the fourth quarter of 2009 was $667 million of net impairment of AFS securities recognized in earnings, compared to $1.2 billion of net impairment of AFS securities recognized in earnings during the third quarter of 2009, as the pace of deterioration in credit quality of the underlying collateral slowed during the fourth quarter.

Other non-interest loss for the full-year 2009 included $11.2 billion of net impairment of AFS securities recognized in earnings. The Company adopted an amendment to the accounting standards for investments in debt and equity securities on April 1, 2009. Consequently, full-year 2009 impairment results are not directly comparable to the full-year 2008 impairment results. Net impairment of AFS securities recorded in earnings was $17.7 billion for the full-year 2008.

Other non-interest loss for the full-year 2009 also included net mark-to-market gains of $11.0 billion, compared to net mark-to-market losses of $17.7 billion for the full-year 2008. Net mark-to-market gains in 2009 were mainly driven by higher long-term interest rates and tighter spreads on the Company’s derivative portfolio, guarantee asset and trading securities during the year.

Credit-related expenses, consisting of provision for credit losses and real estate owned (REO) operations expense, were $7.1 billion for the fourth quarter of 2009, compared to $7.9 billion for the third quarter of 2009. Credit-related expenses for the full-year 2009 were $29.8 billion, compared to $17.5 billion for the full-year 2008.

During the fourth quarter of 2009, the Company identified two errors in loss severity rate inputs used by its models to estimate the C0mpany’s single-family loan loss reserves. These errors affected amounts previously reported. FMCC has concluded that while these errors are not material to the Company’s previously issued consolidated financial statements for the first three quarters of 2009 or to its consolidated financial statements for the full-year 2009, the cumulative impact of correcting these errors in the fourth quarter would have been material to the fourth quarter of 2009. FMCC revised its previously reported results for the first three quarters of 2009 to correct these errors in the appropriate quarterly period. As a result, FMCC increased its previously reported third-quarter 2009 provision for credit losses by $396 million to reflect these adjustments.

Provision for credit losses for the fourth quarter of 2009 was $7.0 billion, compared to $8.0 billion for the third quarter of 2009. Provision for credit losses remained at an elevated level due to continued credit deterioration and challenging economic conditions. The third-quarter results include an adjustment to the provision for credit losses based on observed changes in economic drivers impacting borrower behavior and delinquency trends for certain loans, as well as the adjustments discussed above. For a more detailed discussion, see “QUARTERLY SELECTED FINANCIAL DATA” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

Provision for credit losses for the full-year 2009 was $29.5 billion, compared to $16.4 billion for the full-year 2008, reflecting continued credit losses amid ongoing weakness in the U.S. economy and housing market. The increase in provision for credit losses during 2009 primarily reflected significant increases in delinquency rates and foreclosures and higher severity of losses on a per-property basis.

During the fourth quarter and full-year 2009, the Company experienced further deterioration in its single-family guarantee portfolio.

• Single-family serious delinquency rate, excluding Structured Transactions, was 3.87% at December 31, 2009, compared to 3.33% at September 30, 2009 and 1.72% at December 31, 2008. The increase is due in part to a slowing of the foreclosure process, due to HAMP and other loss mitigation programs, as well as extended statutory foreclosure timelines in many states and servicer capacity constraints.
• Single-family net charge-offs increased to $2.4 billion in the fourth quarter of 2009, compared to $2.2 billion in the third quarter of 2009. Single-family net charge-offs were $7.6 billion for the full-year 2009, compared to $2.7 billion for the full-year 2008.

REO operations income (expense) for the fourth quarter of 2009 was an expense of $88 million, compared to income of $96 million for the third quarter of 2009, reflecting lower recoveries of property write-downs in the fourth quarter compared to the third quarter.

REO operations expense for the full-year 2009 was $307 million, compared to $1.1 billion for the full-year 2008. The decrease was primarily due to a stabilization in home prices during 2009, compared to a sharp decline in home prices during 2008.

Other non-interest expense for the fourth quarter of 2009 was $1.2 billion, compared to $628 million for the third quarter of 2009. Other non-interest expense for the full-year 2009 was $5.2 billion, compared to $3.2 billion for the full-year 2008.

The increase in other non-interest expense for the fourth quarter of 2009, compared to the third quarter of 2009, was driven by a $481 million increase in losses on loans purchased from the Company’s PC pools due to an increase in purchase volume of delinquent and modified loans as more modifications were settled in the fourth quarter of 2009.

The increase in other non-interest expense for the full-year 2009 compared to the full-year 2008 was primarily driven by a $3.1 billion increase in losses on loans purchased due to both an increase in volume and a decline in the fair value of loans purchased from PC pools. Other non-interest expense for the full-year 2008 included a securities administrator loss on investment activity of $1.1 billion related to investments made by FMCC in Lehman Brothers Holdings Inc. in the Company’s role as securities administrator for certain trust-related assets.

Income tax benefit (expense) for the fourth quarter of 2009 was an expense of $440 million, compared to a benefit of $149 million for the third quarter of 2009, primarily due to a decrease in the estimated 2009 taxable loss.

Income tax benefit (expense) for the full-year 2009 was a benefit of $830 million, compared to an expense of $5.6 billion for the full-year 2008. Income tax expense for the full-year 2008 was primarily driven by the Company’s establishment of a partial valuation allowance against the net deferred tax asset in the third quarter of 2008. The Company is required to assess the realizability of the deferred tax asset on a quarterly basis.

At December 31, 2009, the Company had a remaining net deferred tax asset of $11.1 billion, representing the tax effect of net unrealized losses on its AFS securities, which management believes is more likely than not of being realized because of the Company’s conclusion that it has the intent and ability to hold its AFS securities until temporary unrealized losses are recovered.

Financial Strength (Jul-15-2010)	Company	Industry	Sector	S&P 500
Quick Ratio (MRQ)	–	2.25	4.57	0.79
Current Ratio (MRQ)	–	2.29	8.29	0.95
Long-Term Debt to Equity(MRQ)	–	308.97	106.19	135.66
Total Debt to Equity (MRQ)	–	503.20	274.64	203.44

Source: Reuters.com, SEC Filings.

Analyst Consensus

This is the consensus forecast amongst one polled investment analysts. Against the Federal Home Loan Mortgage Corp company.

Analyst Detail	Buy	Outperform	Hold	Underperform	Sell	No Opinion
Latest	0	0	0	1	0	0
4 weeks ago	0	0	0	1	0	0
2 months ago	0	0	0	1	0	0
3 months ago	0	0	0	1	0	0
Last year	0	0	1	0	0	2

Source: www.ft.com

	# of Estimates	Mean	High	Low	1 Year Ago
EARNINGS (per share)
Year Ending Dec-10	1	-2.85	-2.85	-2.85	-9.92

Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=FMCC.OB

Investment Highlights

FMCC recently announced it has auctioned a $1 billion reopening of its 2.875% five-year USD Reference Notes® security that matures on February 9, 2015. The stop yield for the issue, CUSIP 3137EACH0, was 1.93%, priced at 104.110716, or approximately 8 basis points more than five-year U.S. Treasury Notes. The bid-to-cover ratio was 3.835 to 1.

After the reopening, which was conducted via an Internet-based auction, the outstanding size of the 2.875% five-year Reference Notes security will be $6 billion. The issue settled yesterday, Thursday, July 15, 2010, and is listed on the Euro MTF market of the Luxembourg Stock Exchange. All auction details can be found on Freddie Mac’s Debt Securities Web page, www.FreddieMac.com/debt/auctionrepurch/auctions.html.

FMCC recently released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 4.57% with an average 0.7 point for the week ending July 8, 2010, down from last week when it averaged 4.58%. Last year at this time, the 30-year FRM averaged 5.20%. This rate is yet another all-time low in the Company’s 39-year survey.

The 15-year FRM this week averaged 4.07% with an average 0.7 point, up from last week when it averaged 4.04%. A year ago at this time, the 15-year FRM averaged 4.69%.

The five-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.75% this week, with an average 0.7 point, down from last week when it averaged 3.79%. A year ago, the five-year ARM averaged 4.82%. This rate is also an all-time low since FMCC began tracking it in 2005.

The one-year Treasury-indexed ARM averaged 3.75% this week with an average 0.7 point, down from last week when it averaged 3.80%. At this time last year, the one-year ARM averaged 4.82%.

Source: http://www.freddiemac.com/

Technical Analysis

Source: http://stockcharts.com

FMCC’s recent volatility has been greater than normal. This is evidenced by the increased distance between the upper and lower Bollinger Bands. These bands measure volatility using standard deviation and a large width is due to high volatility. Additionally, FMCC is trading within its Bollinger Bands. This is a normal condition and suggests that the stock is neither overbought nor oversold relative to the recent price action.

FMCC’s MACD is currently indicating a weak bullish signal. Although the MACD is trending above the signal line, the indicator is still below zero, which suggests that the underlying moving averages are bearish.

Insider Trading Activity

NET SHARES PURCHASE ACTIVITY Inside Purchases – Last 6 Months
	Shares	Transaction
Purchases	n/a	n/a
Sales	n/a	n/a
Net Shares Purchased (Sold)	n/a	n/a
Total Insider Shares Held	n/a	n/a
% Net Shares Purchased (Sold)	n/a	n/a

Net Institutional Purchases — Prior Qtr to Latest Qtr
	Shares
Net Shares Purchased (Sold)	n/a
% Change in Institutional Shares Held	n/a

Source: Yahoo Finance

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