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

Federal Home Loan Mortgage Corp. (FMCC) also known as 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. Freddie Mac 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 (Aug-9-10)			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	$0.42	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):	17,214,700	Net margin	-7.3%	-407.4%	5480%	n/a	n/a	n/a
Market Cap.	223.50M
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 recently reported a net loss of $4.7 billion for the quarter ended June 30, 2010, compared to a net loss of $6.7 billion for the quarter ended March 31, 2010. After the dividend payment of $1.3 billion on its senior preferred stock to the U.S. Department of the Treasury (Treasury), FMCC reported a net loss attributable to common stockholders of $6.0 billion, or $1.85 per diluted common share, for the second quarter of 2010, compared to a net loss attributable to common stockholders of $8.0 billion, or $2.45 per diluted common share, for the first quarter of 2010.

The Company had a net worth deficit of $1.7 billion at June 30, 2010, compared to a net worth deficit of $10.5 billion at March 31, 2010. The second-quarter net worth deficit was primarily driven by a total comprehensive loss attributable to FMCC of $0.4 billion and the dividend payment of $1.3 billion to Treasury on the senior preferred stock. The second quarter total comprehensive loss attributable to FMCC includes the quarterly net loss of $4.7 billion, partially offset by a $4.3 billion improvement in accumulated other comprehensive income (AOCI).

Net loss attributable to FMCC was $4.7 billion for the second quarter of 2010, compared to $6.7 billion for the first quarter of 2010. This decline was primarily driven by lower derivative losses and a lower provision for credit losses. FMCC’s net loss of $4.7 billion in the second quarter of 2010 was negatively impacted by an out-of-period accounting adjustment with the cumulative effect of $1.2 billion, net of taxes. During the second quarter of 2010, the company identified a backlog related to the processing of certain foreclosure alternatives reported to the company by its servicers, principally loan modifications and short sales. This backlog in processing loan modifications and short sales resulted in erroneous loan data within the Company’s loan reporting systems, thereby impacting its financial accounting and reporting systems.

Net interest income was $4.1 billion for the second quarter of 2010, unchanged from the first quarter of 2010. Net interest yield for the second quarter of 2010 was 70 basis points, compared to 68 basis points for the first quarter of 2010. The increase in net interest yield was primarily driven by lower funding costs due to the Company’s accelerated purchases of delinquent mortgage loans out of PC trusts, partially offset by a decrease in the average balance of the company’s investments in mortgage-related securities. Net interest income and net interest yield exclude the cost of funds received from Treasury under the Purchase Agreement, which are reported as dividends paid on senior preferred stock.

Provision for credit losses was $5.0 billion for the second quarter of 2010, compared to $5.4 billion for the first quarter of 2010. The decrease in provision was mostly driven by a lower single-family delinquency rate and a slower growth in non-performing assets during the quarter, partially offset by an increase in charge-offs and a higher volume of loans subject to TDR accounting, mainly due to an increase in completed modifications under the Home Affordable Modification Program (HAMP).

As described above, the second-quarter results also reflected an out-of-period accounting adjustment which resulted in a pre-tax $1.3 billion increase in the company’s estimate of loan loss reserve and consequently its provision for credit losses in the second quarter of 2010. For further details related to the out-of-period accounting adjustment.

Non-interest income (loss) for the second quarter of 2010 was a loss of $3.6 billion, compared to a loss of $4.9 billion in the first quarter of 2010. Included in non-interest income (loss) for the second quarter of 2010 were derivative losses of $3.8 billion, compared to first quarter 2010 derivative losses of $4.7 billion. The second quarter derivative losses reflected the effect on the company’s net pay-fixed derivative portfolio of a flattening yield curve as longer-term swap interest rates declined.

Non-interest expense was $0.5 billion for the second quarter of 2010, compared to $0.7 billion for the first quarter of 2010. Included in non-interest expense for the second quarter of 2010 was REO operations income of $40 million, compared to REO operations expense of $159 million in the first quarter of 2010, reflecting the recovery of prior period write-downs due to improved REO fair values during the second quarter.

Credit Quality

The Company’s single-family credit guarantee portfolio continues to experience significant credit losses, most of which are attributable to loans acquired from 2005 through 2008. The FMCC’s management believes that the credit quality of the single-family loans the company acquired in the first half of 2010 (excluding those refinance mortgages in the Home Affordable Refinance Program) is strong as compared to loans acquired from 2005 through 2008, as measured by original loan-to-value (LTV) ratios, FICO scores, and income documentation standards.

At June 30, 2010, approximately 30% of the company’s single-family credit guarantee portfolio consisted of mortgage loans originated in 2009 and the first half of 2010. These loans have experienced significantly better delinquency trends at this stage in their lifecycle than loans acquired from 2006 through 2008. Excluding refinance loans purchased pursuant to the Home Affordable Refinance Program, the company believes this improvement reflects recent changes in underwriting standards. During the second quarter of 2010, the revenue from the mortgage loans originated in 2009 and the first half of 2010 exceeded the credit expenses related to these loans. The table below provides certain credit quality data by year of origination for the company’s single-family credit guarantee portfolio as of June 30, 2010.

The single-family delinquency rate was 3.96% at June 30, 2010, compared to 4.13% at March 31, 2010. The second quarter delinquency rate was positively impacted by a slowdown in new delinquencies, largely due to seasonal factors, as well as a higher volume of loan modifications, mortgage loans returning to non-delinquent status, and mortgage loans completing the foreclosure process during the second quarter. The volume and timing of effective modifications impacts the company’s reported single-family delinquency rate.

The multifamily delinquency rate was 0.28% at June 30, 2010, a slight increase from 0.25% at March 31, 2010, reflecting continued weaker fundamentals, such as vacancy rates and effective rents, in certain markets, particularly in the Southeast and West regions.

Total net charge-offs were $3.9 billion in the second quarter of 2010, or 0.80 percent (annualized), of the average total mortgage portfolio, excluding non-Freddie Mac securities, compared to $2.8 billion, or 0.56 percent (annualized), in the first quarter of 2010. The increase in net charge-offs was primarily driven by higher volumes of short sales, REO acquisitions and other foreclosure alternatives associated with single-family loans during the quarter.

Total non-performing assets were $118.7 billion, or 5.9 percent of the total mortgage portfolio, excluding non-Freddie Mac securities, at June 30, 2010, compared to $116.1 billion, or 5.8 percent, at March 31, 2010. The increase was primarily due to the impact of continued weakness in the housing market and the employment market, extended foreclosure timelines in many states, and challenges faced by servicers in building capacity to service high volumes of delinquent loans.

Portfolio Balances

The UPB of the Company’s mortgage-related investments portfolio was $739.5 billion at June 30, 2010, down from $753.3 billion at March 31, 2010, due to ongoing liquidations of the company’s existing holdings outpacing purchases during the period as a result of a lack of favorable investment opportunities. The majority of the company’s purchases consisted of purchases of delinquent loans from PC trusts.

The UPB of the company’s single-family credit guarantee portfolio was $1.87 trillion at June 30, 2010, down from $1.88 trillion at March 31, 2010, primarily due to liquidations exceeding new business activity in the second quarter.

The UPB of the Company’s multifamily mortgage portfolio was $96.5 billion at June 30, 2010, remaining relatively flat compared to $97.2 billion at March 31, 2010.

Net Worth and Senior Preferred Stock

FMCC’s net worth deficit was $1.7 billion at June 30, 2010. As a result of the net worth deficit, FHFA, as Conservator, will submit a request for $1.8 billion in additional funding to Treasury under the terms of the Purchase Agreement. FMCC expects to receive these funds by September 30, 2010.

Including the amount to be requested from Treasury in conjunction with the Company’s second-quarter net worth deficit, the aggregate liquidation preference of the senior preferred stock of $64.1 billion entitles Treasury to annual cash dividends of $6.4 billion. This dividend amount exceeds the Company’s annual historical earnings in most periods. The Company has paid cumulative dividends of $6.9 billion in cash on the senior preferred stock to Treasury since the fourth quarter of 2008 at the direction of FHFA, acting as Conservator.

FMCC expects to request additional draws under the Purchase Agreement in future periods. The size and timing of such draws will be determined by a variety of factors that could adversely affect the Company’s net worth.

Financial Strength (Aug-9-2010)	Company	Industry	Sector	S&P 500
Quick Ratio (MRQ)	–	1.25	3.63	0.75
Current Ratio (MRQ)	–	1.27	6.47	0.89
Long-Term Debt to Equity(MRQ)	–	311.64	88.58	116.56
Total Debt to Equity (MRQ)	–	371.11	222.07	174.58

Source: Reuters.com, SEC Filings.

Analyst Consensus

This is the consensus forecast amongst 1 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

Consensus Estimates Analysis

	# 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 is asking for $1.8 billion in additional federal aid after posting a larger loss in the second quarter. The Company said Monday it lost $6 billion, or $1.85 per share, in the April-to-June period. That takes into account $1.3 billion in dividends paid to the Treasury Department. It compares with a loss of $840 million, or 26 cents a share, in the second quarter a year ago.

The government rescued McLean, Va.-based FMCC and sibling company Fannie Mae from the brink of failure nearly two years ago. The new request means they have needed $148.2 billion to stay afloat, about $63.1 billion of which is being used by FMCC. FMCC is losing money from bad loans it backed, many of them before the housing market went bust. It had $118 billion in bad loans at the end of June, up from $103.4 billion at the end of last year. It owned more than 62,000 foreclosed properties in June, up from about 35,000 a year earlier.

Both Fannie Mae and FMCC have both lost tens of billions of dollars during the past two years and both are asking the government to prop them up. Last week, Fannie Mae requested $1.5 billion after posting a loss of $3.13 billion, or 55 cents per share, in the second quarter. Still, the two companies are taking different approaches to their situations. Fannie Mae sounded optimistic about its future. FMCC offered a more tempered view.

Fannie Mae and FMCC own or guarantee about half of all U.S. mortgages, or nearly 31 million home loans worth more than $5 trillion. They buy home loans from lenders, package them into bonds with a guarantee against default and sell them to investors.

During the housing boom, Fannie Mae and FMCC faced political pressure to expand homeownership and competitive pressure from Wall Street to back ever-riskier loans. When the market went bust, defaults and foreclosures piled up, and the government had to take them over.

Over the next year, lawmakers plan to review the nation’s mortgage-lending system and consider a potential replacement for Fannie Mae and FMCC. The financial overhaul signed by President Barack Obama didn’t address that issue, despite protests from Republicans that it was incomplete without a such a plan. The administration is holding a public conference on Aug. 17 in Washington to discuss the mortgage system.

Supporting the Nation’s Housing Market

FMCC continues to support the nation’s housing market by maintaining a liquid and stable mortgage market and helping distressed borrowers avoid foreclosure. While mortgage market conditions remained challenging in the second quarter of 2010, home prices increased 2.6% nationwide during the first half of 2010, which included a 3.4% increase in the second quarter of 2010, based on the company’s own index of its single-family credit guarantee portfolio.

In the second quarter, FMCC provided approximately $82 billion of liquidity to the market. These funds helped more than 350,000 families own a home, and also supported the nation’s rental market by financing nearly 75,000 units of apartment housing. Approximately $54 billion of the liquidity was single-family refinance volume, 34% of which was Relief Refinance mortgages under the Making Home Affordable (MHA) program. A growing number of borrowers are reducing their monthly mortgage payments through this program.

As FMCC emerges from a period of especially heavy refinance volume, it is implementing strategies to provide responsible, sustainable homeownership opportunities for America’s families. They include educating homeowners and the industry about the new home buying rules and opportunities, strengthening its credit and loan standards and implementing other measures to drive quality and consistency throughout the mortgage process. The high credit quality of the new business delivered to FMCC during the first half of the year is evidence that these strategies are taking hold.

A key part of the Company’s effort to support the market is focused on avoiding foreclosure, working with distressed borrowers to keep them in their homes whenever possible, or facilitating an alternative to foreclosure when keeping the home is not a financially viable option – primarily through short sales and deeds-in-lieu of foreclosure. In the second quarter of 2010, the company provided permanent foreclosure alternatives for 82,260 struggling borrowers through its own long-standing programs and the MHA program. In addition, 61,821 HAMP loans remained in trial periods as of June 30, 2010, according to information provided by the MHA Program administrator.

FMCC continues to work to find ways to help borrowers avoid foreclosure. In the second quarter of 2010, the company implemented additional temporary streamlined modification processes for borrowers who complete an existing trial period but do not qualify for a permanent modification under HAMP. These backup modifications are non-HAMP modifications that are intended to minimize the need for certain additional documentation. The company expects a modest number of modifications under this process in the second half of 2010. In addition, FMCC initiated another component of the MHA program during the quarter – the Home Affordable Foreclosure Alternatives program (HAFA) – that enables struggling borrowers to more easily execute short sales and deeds-in-lieu of foreclosure beginning August 1, 2010.

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

Technical Analysis

Source: http://stockcharts.com

FMCC is trading above its 13 day moving average. This is considered to be the sign of a bullish trend. There is added weight to this indication because the moving average is rising and suggests that there has been buying interest in this stock.

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 0, which suggests that the underlying moving averages are bearish.

Comparative Analysis

Company Name	Ticker	Price per	Mrkt. Cap.	P/E		P/S
Aug-9-2010	symbol	Share, $	$ Mn	2010	2011	2010	2011
Fannie Mae	FNMA	0.39	435.77M	n/a	n/a	0.01	n/a
Federal Agricultural Mort. Corp.	AGM	15.58	158.08M	3.15	n/a	0.88	n/a
Tree.com	TREE	6.84	76.65M	n/a	n/a	0.36	n/a
Consumer Financial Median			223.5M	n/a	n/a	0.41	n/a
Federal Home Loan Mort. Corp.	FMCC	0.42	273.92M	18.74	n/a	0.01	n/a

Source: Thomson Financial

Insider Trading Activity

NET SHARES PURCHSE 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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