After a two-month delay, Freddie Mac revealed its 2005 financial results last week. Originally expected to come out in March but postponed as a result of the company's implementation of a new method of valuing certain assets, the recent report estimated the GSE's 2005 income at $2.1 billion, down from $2.9 the previous year.

The report stated that the drop in net income reflects the $600 million of costs related to three main events: the settling of the securities class action and shareholder derivative litigation, the charges involving Hurricane Katrina and lastly, the net impact of certain accounting changes.

The year was not entirely disappointing for the McLean, Va.-based company, however, as the fair value of net assets attributable to common stockholders before capital transactions increased by $.09 billion over 2005. This signifies a return on the average fair value of net assets attributable to common stockholders of about 3.3%t.

According to Art Frank, head of mortgage research at Nomura Securities, this figure could be misleading as mortgage-to-debt OAS is widening. Yet, apart from this, he still believes that on a forward looking basis, Freddie Mac is in good shape.

In addition, although the company no longer publishes operating results, Morgan Stanley equity analysts estimate that operating results came in at $5.16 to $5.37 per share, ahead of their forecast of $4.89. In the near future, possible positive forces for Freddie Mac include further progress in resuming timely filing status, hiring of a new chief financial officer, continued double-digit growth in the credit portfolio, and possible gains by Democrats in the mid-term elections, according to Morgan Stanley analysts.

A potential setback for the company could come, however, if the Office of Federal Housing Enterprise Oversight imposes similar portfolio limits on the company that were recently placed on Fannie Mae after the company was charged with accounting manipulation. In a question and answer session recently, Freddie Mac CEO Richard Syron stated that the last provision of the FNMA/OHFEO agreement, which is still in the preliminary discussion stages is: "Matters identified for remediation by Fannie Mae should be considered by the Director for application to both Enterprises." After this remark was made, Alec Crawford, managing director and head of agency MBS strategy at RBS Greenwich Capital, noted that there was buying of MBS on weakness from hedge funds and money managers.

(c) 2006 Asset Securitization Report and SourceMedia, Inc. All Rights Reserved.

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