Freddie Mac reports first profit in 2 years

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NEW YORK (Reuters) -- Freddie Mac, the second largest provider of U.S. home mortgage funding, Friday posted its first quarterly profit in two years as gains from hedges and a one-time accounting change offset still-lofty credit losses.

For the first quarter in four, Freddie Mac said it would not need a capital injection from the Treasury to maintain its business of providing credit for U.S. housing. But it said it continues to rely on government money to keep it afloat.

Freddie Mac (FRE, Fortune 500) and larger rival Fannie Mae (FNM, Fortune 500) are seen as key barometers of the U.S. housing market, having expanded their scope as competitors fell during the financial crisis. Under government control since September, they are also being asked to do more for U.S. efforts to stabilize the shaky housing market, even though that is turning out to be a costly effort.

Together, the companies own or guarantee more than $5 trillion in U.S. mortgages.

"Our outlook remains cautious due to rising foreclosures, growing unemployment, tight lending standards, and buyers' reluctance to reenter the market," John Koskinen, Freddie Mac's interim chief executive officer, said in a statement.

Freddie Mac reported second-quarter net income of $768 million, compared with a $9.9 billion loss in the first quarter and a $821 million deficit in the period a year ago.

After payments of $1.1 billion in preferred stock dividends to the U.S. Treasury, Freddie Mac had a net loss of 11 cents per diluted common share.

Freddie Mac said profit was cushioned by a $5.1 billion increase in equity due to the adoption of accounting rules that govern how it must recognize losses. It also had a $4.2 billion gain from derivatives that rose in value as interest rates rose, and greater interest income as its borrowing costs fell.

Provisions for credit losses declined to $5.2 billion in the second quarter from $8.8 billion in the previous period, driven by recent home price improvements, it said. But that benefit is likely seasonal, and provisions will probably rise again, it said.

Fannie Mae on Thursday reported a $14.8 billion quarterly net loss, and noted a "significant uncertainty" to its long-term health given the lingering housing crisis and costs taken to slow foreclosures.