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TH E M R EP O RT | 61 O R I G I NAT I O N S E R V I C I N G A NA LY T I C S S E C O N DA R Y M A R K E T SECONDARY MARKET THE LATEST Freddie Mac Doubles Profits in Q3 Refinances and HARP loans see increase, while interest rates and delinquent loans drop. T he news was all positive for shareholders, inves- tors, and other stake- holders in Freddie Mac's Third Quarter Financial Results released in November—primarily, a net income of $2.3 billion, more than double the previous quarter's profit of $993 million. Many eyes in the industry have been cautiously watching the GSEs as their capital buf- fers continue to shrink, fearing that another draw on Treasury might be needed. FHFA Director Mel Watt, the GSEs' conservator, gave a speech in February 2016 stating that certain risks would continue to escalate as long as the GSEs remained in conservator- ship, namely the reduction of the capital buffers. The capital buffers are required by Congress to be reduced to zero by January 1, 2018. The GSEs have remained profitable amid speculation that they are sinking, however. Freddie Mac's net income for the whole year of 2015 totaled $6.4 billion, even after reporting a net loss of $475 million in Q 3 last year. Even after reporting a net loss of $354 million in Q1 this year, the second loss totaling more than $350 mil- lion in three quarters, Freddie Mac's net earnings recovered to total $993 million in Q2. It was strong business fun- damentals and market-related gains that drove Freddie Mac's solid results for the third quarter, according to Freddie Mac CEO Donald Layton. Freddie Mac's sin- gle-family core book (post-2008), which excludes HARP and other refinance loans, grew to 71 percent of the credit guarantee portfolio— an increase of 2 percentage points from Q2 (69 percent). Also, driven by lower mortgage interest rates, Freddie Mac's purchase volume increased from $91 billion in Q2 up to $116 billion in Q 3. Freddie Mac's serious delinquency rate at the end of Q 3, 1.02 percent, was 6 basis points lower than Q2 and was the lowest for Freddie Mac-backed loans since July 2008, immediately before the crisis. Additionally, Freddie Mac's multifamily purchase volume in Q 3 was $12 billion, bringing the year-to-date total for the first three quarters of 2016 up to $39 billion—15 percent higher than the first three quarters of 2015. Freddie Mac transferred a significant por - tion of credit risk on $40 billion worth of single-family loans in Q 3 and on more than half a tril- lion dollars' worth—$570 billion— since credit risk transfer programs began in 2013. "Freddie Mac's improving busi- ness fundamentals and competi- tiveness were strongly reflected in our results this quarter," Layton said. "Volumes were higher, credit quality is at its best in eight years, and legacy assets are continu- ing to decline. Investments in technology are bearing fruit both for ourselves and our customers. In particular, due largely to our leadership in credit risk transfer, the new business we're winning from single-family and multifam - ily customers poses significantly less risk to taxpayers." Freddie Mac's dividend obliga- tion to Treasury in December 2016 will be $2.3 billion (net worth of $3.5 billion as of September 2016 minus Freddie Mac's capital re- serve amount of $1.2 billion). With that dividend payment, Freddie Mac will have paid $101.4 billion in dividends to Treasury since 2008, approximately $30.1 billion more than the $71.3 billion that Freddie Mac drew from Treasury in September 2008. LTV Ratios Drop on GSE-backed Loans New construction accounts for much of the decline. T he effective interest rate on mortgage loans guaranteed by Fannie Mae or Freddie Mac bumped up from 3.72 percent to 3.73 percent from August to Sep - tember, according to the FHFA's monthly mortgage interest rates report for Septem- ber 2016. The average inter- est rate on all mort- gages backed by the GSEs rose slightly from August to September, from 3.59 to 3.60 percent. The slight increase was largely driven by an increase of 4 basis points on the mortgage rates for previously occupied homes, up to 3.78 percent. Meanwhile, the effective rates on newly con - structed homes declined by 10 basis points, down to 3.58 percent. Newly construct - ed homes were largely responsible for September's over-the-month decline in LTV ratio on GSE-backed loans, according to the National Association of Home Builders (NAHB). The average LTV dropped from 80.1 percent down to 79.9 percent, according to FHFA. "The decline in the LTV ratio on all homes largely reflected a drop in the ratio for newly built homes," said Michael Neal, Senior Economist with NAHB. "Over the month, the LTV ratio on newly built homes dropped to 78.1 percent from 78.8 percent in August while the LTV ratio on previously occupied homes remained basically unchanged, dipping slightly to 80.4 percent from 80.5 percent." The yearly trends for both mortgage rates and LTV ratios have been opposite of what they were from August to September, how - ever. Mortgage rates on GSE-backed loans have largely trended downward in 2016; overall rates declined by 37 basis points between the end of 2015 and September 2016, and effective rates on newly-build homes and previously occupied homes have fallen by 45 basis points and 36 basis points, respec - tively, according to NAHB. LTV ratios on all homes have been trending upward despite the over- the-month decline in September; since January 2016, that ratio has risen by 3 percentage points from 76.9 percent up to 79.9 percent. According to NAHB, the increase in LTV ratio over the last nine months reflects an upward trend in LTV ratio for previously occupied homes, which increased from 76.7 percent in January up to 80.4 percent by September. The LTV ratio on newly-built homes experienced some volatility, but September's ratio (78.1 percent) was the same as December 2015's ratio. "The decline in the LTV ratio on all homes largely reflected a drop in the ratio for newly built homes." —Michael Neal, Senior Economist, NAHB