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.
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