Freddie Mac Q3 2025 Earnings Call - Strong Liquidity Boost and Rising Credit Reserves Mark a Mixed Quarter

Chris Spina, Vice President of Public Relations and Digital Communications, Freddie Mac: Good morning and thank you for joining us for a presentation of Freddie Mac’s third quarter 2025 financial results. I’m Chris Spina, Vice President of Public Relations and Digital Communications. We are joined today by Executive Vice President and Chief Financial Officer Jim Whitlinger. Before we begin, we’d like to point out that during the call Mr. Whitlinger may make forward-looking statements based on assumptions about the company’s key business drivers and other factors. Changes in these factors could cause the company’s actual results to materially vary from its expectations. A description of those factors can be found in the company’s quarterly report on Form 10-Q filed today. You will find the 10-Q earnings press release and related materials posted on the Investor Relations section of FreddieMac.com. This call is recorded and a replay will soon be available on FreddieMac.com. We ask that the call not be rebroadcast or transcribed.

With that, I’ll turn the call over to Freddie Mac CFO Jim Whitlinger.

Jim Whitlinger, Executive Vice President and Chief Financial Officer, Freddie Mac: Good morning and thank you for joining our call to review Freddie Mac’s third quarter performance. Thank you. Let’s start with the headline number. Our third quarter net income of $2.8 billion lifted the company’s net worth to nearly $68 billion at September 30th. The total mortgage portfolio increased to $3.62 trillion as we facilitated the flow of more than $124 billion of liquidity to the U.S. housing market. That was up from $106 billion in the prior quarter. The $18 billion in additional liquidity contributed drove a 33% increase in the number of American families we helped buy, refinance, or rent a home. That total rose to 483,000 in the third quarter versus 363,000 in the second. Most of the houses and apartments we financed were affordable to middle class families, including 92% of the eligible rental units and 54% of the single-family homes.

Among the home buyers purchasing a primary residence, 50% were buying a home for the first time. That’s the American dream and our work helps make it true for more than 1,000 families every day. Now let’s look at the quarterly financial results that support our mission. As I mentioned earlier, we earned net income of $2.8 billion this quarter, a decrease of $332 million or 11% year over year. This decrease is primarily driven by a $175 million provision for credit losses this quarter, primarily attributable to new single-family acquisitions versus a benefit for credit losses in the prior year quarter which was primarily driven by lower mortgage interest rates in single-family and enhancements in the credit estimation process in multifamily. Net interest income in the third quarter was $5.5 billion, up $456 million or 9% year over year.

The primary driver for the increase was higher guaranteed net interest income driven by continued growth in the single-family mortgage portfolio which increased 2% year over year. In addition, a multifamily business strategy change resulted in increased volume of fully guaranteed securitizations. Separately, we benefited from lower funding costs which were partially offset by lower yields on short-term investments. Third quarter non-interest income declined $555 million or 66% year over year to $284 million. This decline was primarily due to single-family investment losses in the third quarter compared to investment gains in the third quarter of 2024. The losses this quarter were driven by interest rate and spread changes. Now diving into our individual business segments. The single-family business reported net income of $2.3 billion for the third quarter, down $226 million or 9% year over year.

Segment net revenues of $4.9 billion decreased by $152 million or 3% from the prior year quarter as higher net interest income was more than offset by lower non-interest income. Net interest income increased $355 million or 8%, benefiting from continued mortgage portfolio growth and lower funding cost, partially offset by lower yields on short-term investments. Non-interest loss of $143 million compared to non-interest income of $364 million in the prior year quarter was primarily driven by interest rate and spread changes. As I mentioned earlier, our provision for single-family credit losses was an expense of $118 million this quarter, primarily due to a credit reserve build driven by new acquisitions as we continue to grow our single-family mortgage portfolio. Our single-family mortgage portfolio at the end of the quarter was $3.1 trillion, up 2% year over year.

In the prior year quarter, we had a credit loss benefit of $99 million, which was primarily driven by lower mortgage interest rates. Our current house price forecast assumes an increase of 0.7% over the next 12 months and 0.9% over the subsequent 12 months. This is a change from our forecast at the end of last quarter, which assumed a 1.3% growth over the next 12 months and a 0.4% growth over the subsequent 12 months. The credit reserve build this quarter totaled $148 million, bringing our single-family allowance for credit losses at the end of the quarter to $7.7 billion. This represents 24 basis points as a proportion of total loans outstanding, up from 23 basis points at the end of the prior quarter and 21 basis points at the end of last year. The credit quality of our mortgage portfolio continues to stay strong.

The weighted average current loan-to-value ratio was 53% at the end of the third quarter, and the weighted average current credit score was 754 at the end of the quarter. 62% of our single-family mortgage portfolio had some form of credit enhancement. Serious delinquencies increased slightly to 57 basis points at the end of the third quarter, up from 55 basis points at the end of the second quarter and from 54 basis points at the end of the third quarter last year. The year-over-year increase is primarily due to loans originated after 2022. In the third quarter, we completed about $6 billion worth of loan workouts, helping approximately 22,000 families remain in their homes. New business activity was $99 billion this quarter, up $5 billion from the second quarter, mainly driven by higher purchase activity.

First time homebuyers represented half of our new single-family home purchase loans secured by primary residences. Refinance activity continues to be limited as mortgage rates remained elevated despite a slight decline during the quarter. In the third quarter, refinance activity accounted for about 18% of our total new business activity. The 30-year mortgage rate peaked at 6.75% early in the quarter and ended the quarter at 6.3%. That was down from 6.77% at the end of the second quarter and up from 6.08% at the end of the prior year quarter. Credit quality of our new acquisition also remained strong with a weighted average original loan-to-value ratio of 77% for the third quarter acquisitions and a weighted average credit score of 756. The average estimated guarantee fee rate on new business was 54 basis points.

Moving on to multifamily, the segment reported net income of $426 million, a decrease of $106 million or 20% from the prior year quarter. Multifamily net revenues increased by 7% or $53 million to $835 million year over year. This uptick was primarily driven by higher net interest income. Net interest income, or NII, increased $101 million or 33% to $408 million. It was primarily driven by a change in the segment’s business strategy that resulted in increased volume of fully guaranteed securitizations. The increase in net interest income was partially offset by lower non-interest income of $427 million, which fell $48 million or 10%. The decrease in non-interest income was primarily driven by lower revenues from held-for-sale, loan purchase, and securitization activities due to the business strategy change. Impacts from interest rate risk management activities partially offset the decrease.

The provision for multifamily credit losses in the third quarter was $57 million compared to a $92 million benefit for credit losses in the prior year quarter. This quarter’s provision for credit losses was primarily driven by a credit reserve build attributable to new loan purchase commitment and acquisition activity and deterioration in the credit performance of certain delinquent loans. The benefit in third quarter 2024 was primarily due to a credit reserve release due to enhancements in the credit loss estimation process. Our multifamily new business activity increased to $25 billion in the third quarter, up from $12 billion in the prior quarter and up from $15 billion in the third quarter last year. This year over year increase was primarily driven by a larger multifamily originations market coupled with the execution of our competitive strategies.

The business provided financing for 195,000 rental units this quarter with 67% of eligible units affordable to low income families. Strong new business activity drove a 6% year over year increase in our multifamily mortgage portfolio to $480 billion at the end of the third quarter. 90% of the multifamily mortgage portfolio was covered by credit enhancements at the end of the quarter. The multifamily delinquency rate at the end of the quarter was 51 basis points, up 12 basis points from the end of September 2024. This increase was primarily driven by increased delinquency in our floating rate loans and small balance loans. 90% of these delinquent loans had some form of credit enhancement coverage. On the capital front, we grew our net worth to $68 billion at the end of the quarter, which represented a 20% increase year over year.

I’ll end with two thoughts on our ongoing effort to make finding or financing a home a better experience. First, we believe we can help support efforts to expand the homes and apartments available for sale or rental. Last quarter, U.S. Federal Housing announced a doubling of Freddie Mac Multifamily’s annual Low-Income Housing Tax Credit equity cap from $1 billion to $2 billion. Since re-entering that market in 2018, we’ve invested more than $5 billion in LIHTC equity, which has helped build or renovate over 33,000 affordable rental homes across the nation. On the single-family side, we’ve expanded our conventional financing options to include modern single section, factory-built homes. Taken together, these actions contribute to solving the nationwide shortage of affordable homes, though there remains much to do. Second, our commitment to steadily enhancing our digital tools continues to wring cost out of the mortgage process.

Our recent cost originate study shows that lenders making full use of Freddie Mac’s suite of digital tools save about $1,700 per loan on average. That was $200 more in savings than just two years ago. These enhancements are among the many incremental changes we are making every day to improve the lives of lenders, borrowers, and renters while building a safer, sounder Freddie Mac. Thank you for joining us today.