Freddie Mac Earnings Down 52%

Wednesday, June 30th 2004, 9:31 am

By: News On 6

WASHINGTON (AP) _ A year after its accounting crisis erupted, mortgage giant Freddie Mac reported Wednesday a 52 percent drop in earnings last year amid volatile interest rates and losses as it hedged against risk.

The second-largest U.S. buyer of home mortgages said its net income fell to $4.9 billion, or $6.79 a share, in 2002 from $10.1 billion, or $14.18 a share, in 2002.

The report of its annual results was delayed by the accounting problems as the government-sponsored company untangled a $5 billion misstatement of earnings _ mostly underreported _ for 2000-2002.

The earnings decline had been expected by financial analysts.

``We are making substantial progress overhauling Freddie Mac's financial reporting and accounting systems, but this process is a challenging one and more hard work is in front of us,'' Martin Baumann, the company's chief financial officer, said in a statement. ``As part of this effort, we are devoting the full scope of our corporate resources to rebuilding our processes and systems to return to timely reporting as quickly as possible.''

The accounting crisis at Freddie Mac forced out two chief executives and other top officials and resulted in investigations by the Justice Department and the Securities and Exchange Commission. The company paid a record $125 million civil fine in December in a settlement with federal regulators, who blamed management misconduct for the faulty accounting.

Freddie Mac and its larger rival, Fannie Mae, have been under investigation by regulators since the problems came to light at Freddie Mac last June.

Freddie Mac's earnings continued to be volatile in 2003, ranging from a $288 million loss in the third quarter to a second-quarter profit of $2.5 billion, the company said Wednesday.

The company said it was accounting for gains and losses from changes in the value of financial instruments, known as derivatives, that it uses to hedge against interest-rate and other risk. The paper gains and losses were unrealized because Freddie Mac still held the underlying assets at the end of the quarters.

At the same time, expenses increased to $2.1 billion in 2003 from $1.9 billion in 2002, as the company paid some $124 million in auditing and consulting fees and $48 million in legal fees.