Federal Home Loan Mortgage Corp (OTCBB:FMCC) witnessed a huge decline in the net income as well as in the profit for the 4Q2014 as compared to the 4Q2013. The reason behind this adverse performance is said to be the interest rate hedges.
Insights On The Matter:
The total loss due to interest rate hedge, was $3.4 billion figure in the previous quarter, which set-off maximum of FMCC’s profit. After the interest rate hedge, the total equity capital of FMCC, come down to $1.8 billion, which elevated the chances of future losses. Taxpayers’ money is at huge risk now, which means that if the company doesn’t take any suitable step in the next few days, then it may have to face bigger problems in coming days.
The interest rate hedge affected the profitability of Federal Home Loan Mortgage Corp (OTCBB:FMCC). The net income for 4Q2014 was $227 million, 90% lesser than the net income of the previous quarter. FMCC managed to earn $2.1 billion in 3Q2014, but due to the interest rate volatility, it failed to continue the same in the next quarter.
How Was Interest Rate Hedge Responsible For The Loss:
As per the reports, FMCC suffered $3.4 billion loss on the derivatives that it hedged against the ever-rising interest rates. Whenever a company hedges its derivatives against the interest rate hike, it can only make money if the interest rates shoot up. Unfortunately, it didn’t happen in 4Q2014, which caused more than expected loss to Federal Home Loan Mortgage Corp (OTCBB:FMCC).
The interest rates for 10-year treasury bills on October 1, 2014 were 2.4%, which came down to 2.17% on December 31, 2014. Since that time, it has been falling continuously. The only chance of this huge loss to reverse in the future is hike in interest rates. If it doesn’t happen, then FMCC may have to face a lot of problems.