Freddie Mac Records Lower Annual Profit as Value of Derivatives Declines

Freddie Mac, the second-biggest U.S. mortgage buyer, said Thursday that 2004 profit fell 42% as the value of financial contracts used to protect against swings in interest rates declined.

Net income decreased to $2.8 billion, or $3.78 a share, from $4.9 billion, or $6.79, in 2003, the company said. The current, or fair, market value of the government-chartered company’s assets minus liabilities rose 13% to $30.8 billion, including $26.7 billion attributed to common stockholders.

The earnings report is just the second for McLean, Va.-based Freddie Mac since a 2003 internal investigation found it understated net income by $5 billion from 2000 through 2002, leading to an overhaul of the company’s accounting that is still underway. Chief Executive Richard Syron said Thursday that the company still had “a lot of work” to do in fixing the accounting.

The increase in fair value “gives some indication that the operating earnings of the company were performing in line with expectations, despite the vagaries” of accounting rules that require that the company write down the value of the financial contracts, known as derivatives, said Moshe Orenbuch, an analyst at Credit Suisse First Boston.

Freddie Mac shares rose 26% in 2004 as Syron, who joined the company in December 2003, hired new managers and gained investor confidence. The performance compares with a 9% gain for the Standard & Poor’s 500 index and a 5% drop for Fannie Mae, the biggest U.S. mortgage buyer.

The shares fell 70 cents Thursday to $63.20 on the New York Stock Exchange. They are down 14% for the year.