TH providing color on credit loss expenses/reserves: "There are two different things going on with Freddie’s credit statistics.
The decline in the percentage of loans in forbearance is the expected consequence of having many borrowers who took advantage of the company’s Covid-related forbearance policy returning to paying status, and we should expect to see this percentage continue to decline in future quarters.
The shift from a (positive) benefit for credit losses in the second quarter of 2021 and the first quarter of 2022 to a (negative) provision for credit losses (of $307 million) last quarter is something I’ve been alerting readers to expect for some time. Both Freddie and Freddie saw massive increases in their provisions for loan losses between June 30, 2008 and December 31, 2011, and a consequent huge increase in their loan loss reserves. This was one of the main ways FHFA, in coordination with Treasury, engineered the mammoth non-cash losses that resulted in the need for the companies to take huge draws of senior preferred stock during this period. Since the end of 2011, both companies had been reversing those unneeded loss reserves through positive benefits for loan losses. Finally, at the end of 2021, the loss reserves at each had been drawn down to a more normal level. For Freddie, that was 17 basis points as a percent of outstanding single-family loans guaranteed. So, what should we expect to have happened subsequently? Both companies should now be making positive loss provisions to cover their current-quarter net credit losses (Freddie’s, in the second quarter, were $64 million) and to keep their loss reserve growing in line with their book. That’s exactly what we saw in the second quarter of this year. I consider “normalized” single-family credit losses at both companies to be around 4 basis points per year (they’re still below that), and for Freddie–with its $2.93 trillion in single-family loans guaranteed–that would be $1.17 in loan loss provisions per year, or $293 million per quarter, very close to the $307 million provision it actually took.
The other reason (aside from the expected shift from a positive to a negative loss provision) for the drop in Freddie’s second quarter 2002 earnings from this year’s first quarter and the second quarter of 2021 was significantly slower amortization of upfront guaranty fees, because of the recent rise in interest rates. This reduced level of upfront fee amortization should continue for the foreseeable future."
AI
