Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The previous edition in the series can be found here. If you have any thoughts on the series you would like to share, feel free to do so through the “Contact Us” page; we appreciate any feedback. Thanks in advance!
Start of notes for Federal Home Loan Mortgage Corporation (Freddie Mac)
Data as of 31 March 2026
- Freddie Mac has a long history of profitability since 2012, and the net profit has been quite consistent:
* Net profit is to company, and not to common shareholders, because under the current conservatorship, the net profit of Freddie Mac essentially accrues to the Senior Preferred Securities
** 2013’s net profit was unusually high because of a large US$23.305 billion income tax benefit, largely as a result of a one-time release of valuation allowance against net deferred tax assets; for perspective, 2012 and 2014’s income tax expenses were -US$1.537 billion and US$3.312 billion, respectively
*** 2017’s net profit was low because of a large US$11.209 billion income tax expense, largely as a result of a one-time tax charge of US$5.4 billion for federal income taxes; for perspective, 2016 and 2018’s income tax expense were US$3.824 billion and US$2.239 billion, respectively
- In September 2008, the US Treasury provided financial support to Freddie Mac by investing in the company’s senior preferred stock (SPS). The SPS also gave the US Treasury warrants to purchase shares equal to 79.9% of Freddie Mac’s common stock, on a fully-diluted basis, for effectively nothing.
- Under the terms of the SPS, the US Treasury has committed US$211.8 billion in funding-support, and Freddie has drawn down US$71.6 billion as of 31 December 2025. Freddie last drew upon the funding support in early-2018, with the super-majority of the amounts being drawn-down in 2008-2011. Freddie has paid a total of US$119.7 billion in dividends to the US Treasury as of 31 December 2025, which is substantially higher than what Freddie has drawn upon; Freddie stopped paying the US Treasury a dividend in 2019 Q3 at the direction of the government. The SPS terms initially came with a dividend rate of 10% annually in cash, or 12% annually in payment-in-kind. Based on IRR (internal rate of return) calculations, the US Treasury has earned an annual return of 12.7%, which is higher than the dividend-rate of the SPS.
- The SPS also comes with a liquidation preference. As of 31 March 2026, the liquidation preference for the SPS is US$143.0 billion. What Freddie’s common stock is worth will depend heavily on how the US Treasury sees the liquidation preference terms for the SPS. If the US Treasury decides to waive the liquidation preference and thus cancel the SPS, there can be significant value in Freddie’s common stock. If the US Treasury wants to pursue the liquidation preference, through, say, conversion of the SPS into common stock, then the value in Freddie’s common stock can be wiped out.
- As a sense check, Freddie’s total diluted outstanding common shares (this includes full conversion of the SPS-related warrants owned by the US Treasury) of 3.234 billion as of 31 December 2025. Net income in 2025 was US$10.731 billion. Diluted EPS in 2025 is thus US$3.32. At a P/E of 8, Freddie’s stock price would be nearly US$27. Freddie’s stock price as of 31 March 2026 is only US$6.40. A P/E of 8 is consistent with what Farmer Mac (Federal Agricultural Mortgage Corporation) carries at the moment. Farmer Mac is equivalent to Freddie Mac, but for loans made to farmers (Freddie Mac is for mortgage loans). Farmer Mac is much smaller than Freddie Mac, with annual net income in the US$150 million to US$200 million range. So Freddie might even deserve a premium; at a P/E of 12, Freddie’s stock price would be US$40.
- Just official confirmation from Treasury that it wants to cancel the SPS and waive the liquidation preference can significantly boost Freddie’s stock price, without anything else changing.
- One negative point worth noting is the enterprise regulatory capital framework (ERCF) that Freddie is under. The ERCF is imposed by the FHFA (Federal Housing Finance Agency) and requires Freddie to hold a certain amount of risk-weighted capital in-relation to the assets owned by the company. Right now, the ERCF applied to Freddie requires a CET1 (Common Equity Tier 1) ratio of 4.5%, which is really high and is similar to a US bank. Under the current ERCF, Freddie’s risk-based adjusted total capital has a shortfall of US$165 billion.
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