Despite the turmoil in the subprime market, which some thought might boost the government-sponsored enterprises' share of the mortgage-backed securities market, Freddie Mac has said its credit guarantee business continues to suffer pricing pressure.
The McLean, Va., GSE's guarantee portfolio grew 10.6% last year - slightly faster than the 10.5% rate in 2005 - and it earned $1.6 billion in guarantee fees, compared to $1.4 billion the year before. But its overall fee rate slipped to 15.4 basis points, from 15.7 in 2005.
Freddie has increased "the amount of capital deployed to support expanded guarantee activities, including a higher percentage of nontraditional mortgages," Richard Syron, the company's chief executive, said on a conference call Friday to discuss fourth-quarter results.
"This helped us to increase both our underlying guarantee portfolio and guarantee income despite continued competitive pressure in a market overflowing with liquidity," he said.
Nevertheless, Patricia Cook, the company's executive vice president for investments and capital markets, said she sees, "almost irrespective of the credit quality … pressure on" guarantee fees.
Eugene McQuade, the company's president, suggested that some positive movement in pricing might come down the road, however.
"If you look at what's happening, at least with the GSE portfolios over the past four or five years, the credit experience has been extraordinary," he said.
"And I think that's now reflected on the last year or two of repricing of these [guarantee] fee portfolios," he added. "The contracts are done a year or so ahead of time, and I think they're reflective of the environment prior to some of the dislocation we've seen in the last two or three months."
Moshe Orenbuch, an analyst at Credit Suisse Group, was skeptical about how much room Freddie has to maneuver on price.
"In its credit guaranty business, we expect modest portfolio growth in 2007, which should be partially offset by declining credit guarantee fees," he wrote in a research note published Friday.
Still, Freddie said it sees opportunities to fill a growing gap in the nonprime market.
"With the dramatic changes that are occurring in the … subprime, and even alt-A, market, where liquidity is drying up, I think there is an opportunity for Freddie Mac to both provide liquidity and take a leadership role on the credit side," Ms. Cook said.
Derivatives losses, realized losses, and market markdowns on its credit guarantee portfolio - as well as higher administrative costs - drove the company to a $480 million loss in the fourth quarter, compared with earnings of $684 million a year earlier.
The expectation of higher credit losses contributed to markdowns in the value of Freddie's business, said Buddy Piszel, the company's chief financial officer.
But credit-related expenses for the year were down slightly, to $275 million, from $291 million in 2005, when Freddie took provisions of $128 million for Hurricane Katrina. It reduced these reserves by $82 million last year.
By reporting its results before the end of the month, Freddie achieved a previously stated goal for release of its 2006 results but did not update its guidance for a return to timely quarterly reports The first-quarter report is still scheduled to be released the second half of this year.
The company has been struggling to overhaul its internal controls and reporting systems.
Mr. Orenbuch wrote that he was "disappointed that a more definitive time line was not released" and that "it does not appear that Freddie will return to timely financial reporting in 2007."
