Although Freddie’s earnings tweet today touted reduced delinquencies, the 3Q earnings tell a different tale about forward-looking risk.  In just one quarter, Freddie has gone from releasing reserves to provisioning against loss, doing so based on a new model that looks askance at early-warning trends presaging increased mortgage risk.  If the model is right, better earnings now may be challenged not only by the usual mark-to-market volatility that takes the GSEs off the profit track, but also by structural earnings challenges.  Counterparties may also face tougher questioning.

The full report is available to retainer clients. To find out how you can sign up for the service, click here.